Tuesday 31 May 2016 2:18 pm

Investment bank Societe Generale says Osborne will miss his target of a budget surplus by tens of billions of pounds

By: Jake Cordell

George Osborne will not even come close to meeting his budget surplus target and the next move for UK interest rates will be down, according to Societe Generale's gloomy global economic outlook, published today.

The investment bank said risks were stacking up across the world and the current "sweet spot" for financial markets could come to an abrupt halt if a host of political uncertainties from Europe to the USA and China were to materialise.

"The UK economy is losing momentum … Across the globe, we expect policy uncertainty to remain high, be it related to the busy political agenda in Europe, US presidential election or economic policies in many of the major emerging economies," the bank said.

Chief UK economist Brian Hilliard forecast George Osborne will only be able to close the budget deficit to 2.9 per cent of GDP – rather than eradicating it completely as his own fiscal rules mandate. Last year the government was forced to borrow £76bn – 3.9 per cent of GDP – to cover the budget shortfall.

The chancellor's plan to end austerity in 2019 is "entirely arbitrary … there is no economic justification, and that's a problem of Osborne's own making," Hilliard added.

With growth in the UK pitted to slow to 1.8 per cent this year, 1.6 per cent in 2017 and just 1.4 per cent in 2018, and productivity to remain in the doldrums, Societe Generale also said that the Bank of England had missed its opportunity to raise interest rates. It believes rates will stay locked at 0.5 per cent until 2019, when a cyclical recession in the United States will force the Bank to start taking rates even lower.

Analysts at Societe Generale said there was a 40 per cent chance of some combination of potentially toxic political events, such as Brexit, gridlock in Spain, the "never-ending programme for Greece", or elections in France and Germany next year, knocking at least one percentage point off potential growth. 

"Any external shock could push the Eurozone into a recession or a slowdown," said Michel Martinez, chief euro economist, "In that case, all those political issues would become a source of concern."