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New fears for UK economy after GDP downgrade

Monday 8th March 2010

By Mike Jones

Ahead of the Chancellor’s forthcoming Budget, the British Chambers of Commerce (BCC) has published its latest Economic Forecast. The business group maintains a prediction of 1.0% GDP growth in 2010, but it has downgraded its growth expectations for 2011 because the obstacles to a sustained medium-term recovery now appear greater.

Despite the downward revision to next year’s GDP forecast, the BCC is more optimistic about the number of job losses the country will experience, reducing its prediction for peak unemployment to 2.65 million by the third quarter of this year.

Main features of the BCC forecast include:

* Britain’s economic recovery started in the fourth quarter of last year, but GDP growth will be modest and below the historical average over the next few years. In annual average terms, we are now forecasting positive GDP growth of 1.0% in 2010 and 2.1% in 2011. In its December forecast, BCC predicted higher growth for 2011, at 2.3%, but this has been downgraded largely because the obstacles to a sustained medium-term recovery now appear greater;

* Unemployment is likely to rise further in the next six to nine months, and employment will continue to fall but at a slower pace. BCC's new forecast envisages that total unemployment will increase from 2.46 million (7.8% of the workforce), to a peak of 2.65 million (8.4% of the workforce) in the third quarter of 2010. In December, BCC predicted a slightly higher jobless peak of 2.7 million.

* BCC forecasts that public sector borrowing will total £163billion (11.6% of GDP) in 2009-10, and £165billion in 2010-11, before easing to £147billion in 2011-12. BCC expects lower initial deficits than the Treasury predicted in the Pre-Budget Report: £178billion for 2009-10 and £176billion for 2010-11. However, from 2011 onwards, BCC believes the Treasury’s forecasts are too optimistic. Significantly, this forecast confirms that the UK’s public finances are on an unsustainable medium-term path, with net public sector debt set to increase to dangerous levels in excess of 80% of GDP.

* The forecast assumes that the Monetary Policy Committee (MPC) will maintain the £200billion currently allocated to the Quantitative Easing (QE) programme over the next few months. BCC expects the UK Bank Rate to remain at 0.5% until Q3 2010; thereafter, we forecast modest and gradual increases, to 1% in Q4 2010 and to 2.50% in Q4 2011.

BCC Director General David Frost, said: "The recession may have technically ended, but there is no room for complacency. For the recovery to be sustained, it is crucial that all the political parties recognise the vital role of wealth-creating businesses in driving economic growth and job creation.

"The Government must use the forthcoming Budget as a platform for laying the foundations for a business-led recovery. If it fails to do so, the recovery will take longer to gain momentum and may even slip into reverse.

"New business taxes must be avoided and unnecessary red tape suspended. The 1% hike in employer National Insurance Contributions, planned for April 2011, should be abandoned immediately as it is a tax on jobs, which will cost firms £4.7 billion every year. Raising VAT by one percentage point, to 18.5%, will largely offset any lost revenue and it will be less damaging to business.

"The vital medium-term reduction in government debt and borrowing should entail curbing public spending in all areas except for key infrastructure expenditure, which will act to boost long-term growth and employment across the country.

"A credible deficit-reduction plan, which both business and the markets can accept as realistic, must avoid stifling the economy’s growth potential, and it absolutely must enable companies to invest and export."

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