By Claire West

In its latest Quarterly Economic Forecast, published today (Monday), the British Chambers of Commerce (BCC) has downgraded its growth expectations for 2011 and 2012. The new forecast is predicting UK GDP growth of 1.3% in 2011 and 2.2% in 2012, down from its March forecast of 1.4% and 2.3%.

The business group is also raising its forecasts for annual CPI inflation to 4.5% in 2011 and 2.7% in 2012, up from 4.2% and 2.3%. While an increase in unemployment of around 150,000 over the 15 months to the middle of 2012 is still expected, the BCC now believes there will be a slightly lower jobless level at that time — 2.6 million rather than the 2.65 predicted in March.

Commenting, David Frost, Director General of the British Chambers of Commerce, said:

“This forecast suggests that the economy is still facing difficult challenges in the years ahead. Although growth will be slow, the government is right to persevere with its plans to cut the deficit.

“But this must be balanced with policies that allow business to drive the recovery. The Budget was a positive start, but the government has more to do if the private sector is to create new jobs, invest and export and contribute to a lasting economic recovery in the UK. New regulatory burdens, business taxes and measures that damage initiative, enterprise, and innovation must be avoided or scrapped — otherwise we risk unemployment increasing by more than the 150,000 figure predicted in our forecast.

"British business is willing and able to drive the recovery, but it can only do this if the government backs its words with deeds. Without a credible strategy aimed at driving growth, there is a danger that the recovery will fizzle out.”

David Kern, Chief Economist at the British Chambers of Commerce, said:

“Although we have reduced our growth expectations, our forecast conveys a positive message overall. A new recession is unlikely, and while growth will initially be slow, it will stay in positive territory. The recovery will gradually gather momentum from the fourth quarter of 2011 onwards, with growth strengthening further in 2013.

"It is difficult to assess growth in the second quarter because of the volatility of the construction sector, and the uncertain impact of the Royal Wedding. But with the number of days worked in April lower than usual, we expect that the net effect will be to slightly reduce GDP growth. We expect low quarterly growth of 0.3% in Q2 and Q3 of 2011, followed by an increase to 0.6% at the end of 2011 and during 2012.

"The pace of the UK recovery will be slow over the next 18-24 months for a number of reasons: tough fiscal austerity, which will dampen domestic demand; higher than expected inflation, which will reinforce the squeeze on disposable incomes; and worrying global trends, that will pose challenges to a resurgence in world trade. Nevertheless, if the correct policies are adopted, we expect growth to strengthen gradually. Our forecast assumes that the main drivers of UK growth over the next two years will be net exports and, to a lesser degree, business investment.

"We are expecting the Bank of England rate to start increasing in August 2011. Although we would prefer to see interest rates held until the fourth quarter, we believe British businesses will be able to absorb small increases. But the MPC must act with great caution and must not be too aggressive in its tightening.”

Key features of the forecast include:

• The new GDP growth forecast for 2011 is slightly lower than in March, mainly because of weaker than expected growth in the first quarter, and because of certain factors that are likely to reduce growth in the second quarter.

• The new GDP growth forecast for 2012 is slightly lower than in March because we are now predicting higher inflation and a slightly faster pace of interest rate rises next year.

• Higher than expected inflation figures have meant that our forecast for annual CPI inflation has increased. We expect inflation to rise further in the next few months, as petrol prices and utility bills increase, and then fall gradually over the next two years.

• Although our GDP growth forecast is marginally lower than in March, we are predicting a similar net increase in unemployment (150,000). This is because wage pressures are likely to be weaker than initially thought.

• We are expecting interest rates to increase from August 2011, but at a faster pace that we envisaged in March. We are now predicting that the Bank of England rate will reach 1% by the end of 2011, and 2.75% by the end of 2012.

• We believe that the government’s tough fiscal programme aimed at stabilising our public finances will strengthen the UK economy in the longer term. But we believe progress will be slower than the OBR predicted in March, because our GDP growth forecasts are lower. For 2012/13 we are forecasting public sector borrowing of £108 billion, while the OBR has predicted £101 billion for that year.