By Claire West
The British Chambers of Commerce (BCC) today (Monday) published its new Quarterly Economic Forecast, downgrading its prediction for UK GDP growth in 2012 to 0.6% (from 0.8%) - lower than GDP growth in 2011 of 0.8%.
Although growth will be slower in 2012 than the previous year, BCC’s forecast predicts growth of 1.8% in 2013, when prospects will improve. The business organisation believes that a double-dip recession will be avoided, but that the Chancellor must “pull out the stops” to enable businesses to drive growth in the UK.
After contracting by 0.2% in Q4 2011, the UK economy is still facing serious challenges, but risks of a further GDP decline in Q1 2012 have eased, and the BCC believes that a recession will be avoided.
The main drivers of UK growth over the next two years will be net exports and business investment. However, debt levels are still too high and the process of de-leveraging will depress demand and will result in a relatively long period of low growth.
The Chancellor must be as concerned about growth as he is about deficit reduction. It is vital for the UK to maintain credibility in international markets which could be put at risk by a departure from Plan A. However there is a danger that anaemic growth could lead to missing the net debt target and result in government debt rising.
GDP growth will slow from 0.8% in 2011 to 0.6% in 2012, and then strengthen to 1.8% in 2013. In December we predicted UK GDP growth of 0.8% in 2012 and 1.8% in 2013.
We expect UK GDP to record very little growth in the first two quarters of 2012, only about 0.2-0.4% in total. The quarterly growth pattern will be volatile this year. But it will improve gradually from the second half of 2012 onwards and to return to more normal rates during 2013.
After a rebound in Q1, growth is likely to weaken in Q2 due to the additional Bank Holiday for the Queen’s Diamond Jubilee. The London Olympics in Q3 may also distort the growth figures.
Although the pace of UK expansion is likely to remain below trend until the second half of 2013, growth is forecast to be markedly stronger in 2013 and 2014 than in 2011 and 2012.
We expect consumer spending, after falling by 0.8% in 2011, to record positive growth of 0.8% in 2012 and 1.7% in 2013.
UK unemployment will increase from 2.67 million (8.4% of the workforce) in October-December 2011, to 2.90 million (9.0% of the workforce) in Q1 2013, a net increase of some 230,000 in the jobless total.
Unemployment in the 16-17 age group is forecast to total around 223,000 (a jobless rate of 41.0%) in Q1 2013.
Unemployment in the 18-24 age group is forecast to total around 850,000 (a jobless rate of 23.0%) in Q4 2012.
Public finances and inflation
Our public sector borrowing forecast for 2011/12 is £119.3bn, some £8bn below the latest OBR forecast published in November 2011.
In average terms, we are now predicting annual CPI inflation at 2.7% in 2012 and 1.9% in 2013, after 4.5% in 2011. For annual average RPI inflation we are now predicting 3.2% in 2012 and 2.3% in 2013, after 5.2% in 2011.
Interest rates and QE
Weak growth prospects, both globally and in the UK, will make it necessary to keep official interest at very low levels for much longer than previously envisaged.
Interest rates will remain at 0.5% until the final months of 2013 and then see modest increases, reaching Q2 2014. In our December 2011 forecast we predicted that the MPC would start raising rates in Q1 2013.
We expect the MPC to maintain the Quantitative Easing (QE) programme at its current level £325 billion at least until Q4 2013. Some commentators expect additional increases in QE; but this seems on balance unlikely, since the benefits of such a move are questionable.
QE could be made more effective and helpful for businesses if the MPC would be prepared, as part of the programme, to buy private sector assets, instead of focusing exclusively on gilts.
Measures needed at Budget
Scrap the swingeing 5.6% business rates rise expected in April 2012, which will aggravate chronic cashflow issues and threaten business survival.
Implement an effective credit easing programme, and consider the creation of an SME bank to improve the follow of credit to viable businesses.
A speeded-up National Infrastructure Plan and delivery of the mechanisms promised in the Autumn Statement to increase private investment in infrastructure projects.
An aviation strategy that delivers both capacity for the South East and growth opportunities for Britain’s regional airports.
Delivery of radical reforms to the planning system in the National Planning Policy Framework to help businesses expand, invest and grow.
Help for SMEs trading internationally, through improved access to mentored outbound missions, smarter use of inbound missions and greater financial support for promotional activity and tradeshow attendance.
Real de-regulation that makes a difference to businesses on the ground. This should include reform of dismissal rules including relaxing the collective redundancy rules and introducing a new no-fault dismissal route.
Commenting, John Longworth, Director General of the British Chambers of Commerce, said:
“The UK economy faces serious challenges, with problems in the eurozone creating difficulties for exporters, combined with dampened domestic demand. With one quarter of negative growth behind us, growth will be slow in 2012, but we believe a recession will be avoided. Our economic forecast underlines the need for the government to deliver a Budget that will bring confidence to businesses. The Chancellor must pull out the stops to enable British businesses to drive growth here at home.
“Businesses up and down the country are doing their utmost to find new markets and grow their firms, despite the difficult economic challenges they face. Only the private sector will drive recovery and help deliver public services, like education, healthcare and pensions. A sustainable recovery depends on creating the right conditions to empower businesses to drive growth. Companies need the best possible environment to generate wealth and create jobs.
“The government must stick to Plan A, but also stimulate growth within the economy. There is room within the current spending envelope for measures that will encourage firms to export, invest and grow. Real de-regulation, a simply easy-to-use planning system, improving the flow of credit to firms, and improving our lacklustre infrastructure and skills system — these are the measures businesses want to see from a government confident enough to take radical measures to squeeze every last drop of growth out of the UK economy.”
David Kern, Chief Economist at the British Chambers of Commerce, said:
“While a recession will likely be avoided, and GDP will record very little growth in the first two quarters of 2012, we expect UK economic growth to improve gradually from the second half of 2012 onwards, and to strengthen during 2013. However, the pace of expansion is likely to remain below trend until the second half of 2013. Falling inflation will ease the squeeze on living standards, but the adjustment facing the UK will be painful. GDP and consumer spending will only return to pre-recession levels in the second half of 2014.
"We expect official interest rates to remain at 0.5% until the final months of 2013, and then rise modestly to 1.00% in Q2 2014. The Quantitative Easing (QE) programme is likely to be maintained at its current level £325 billion until at least Q4 2013. A further increase in QE is unlikely on balance, as the benefits of it are questionable.
"The UK has earned considerable credibility in the financial markets as a result of the forceful fiscal policies the Government has pursued since June 2010. With public sector borrowing likely to undershoot the OBR forecast by approximately £8bn, a fiscal stimulus totalling some £4bn would be consistent with maintaining strong UK market credibility and would not endanger our AAA credit rating. The critical priority is to sustain growth while cutting the deficit.”