By Daniel Hunter
The British Chambers of Commerce (BCC) today (Thursday) has published its latest economic forecast, which sees UK growth in 2013 revised downwards from 1.0% to 0.6% in 2013, and from 1.8% to 1.7% in 2014.
Businesses are resilient and have the ambition needed to drive our national recovery forward, but reduced global growth prospects, and the ongoing need to repair Britain’s balance sheet, will slow the pace of the UK recovery over the next couple of years.
However prospects will gradually improve in the medium term. We hope to see the Chancellor use his Budget on March 20th to deliver radical measures, including a significant re-prioritization of resources, to enable businesses to create jobs, invest and export.
The BCC is cutting its UK growth forecast for 2013 from 1.0% to 0.6% in 2013 and to 1.7%, down from 1.8%, in 2014.
In December 2012, we predicted growth of 1.0% in 2013 and 1.8% in 2014.
The downward revision to our forecasts is due to the following factors:
1) the unexpected 0.3% GDP decline in Q4 2012;
2) worsening global growth prospects, mainly in the eurozone; and
3) the ongoing need to mend Britain’s public finances.
We expect UK growth to improve gradually over the medium term, but the recovery will be slow by historical standards.
For 2015, we predict stronger UK GDP growth of 2.2%.
Main components of demand
Household consumption. After rising by 1.0% in 2012, household consumption will grow by 1.0% in 2013, 1.9% in 2014 and 2.2% in 2015. Gradual declines in inflation over the next two years, though slower than expected in December, will ease the squeeze on disposable incomes and create moderate increases in domestic demand.
Business investment has been volatile in quarterly terms over the last year or so. Despite the weakness of the economy, we expect business investment to strengthen gradually, growing by 5.0% in 2013, 5.1% in 2014, and by 5.2% in 2015.
The much-needed rebalancing of the UK economy has remained slow. In 2012 exports fell by 0.3% and imports rose by 2%. Our new forecast is that exports will grow by a very modest 1.1% in 2013, accelerating gradually to 3.3% in 2014, and 4.1% in 2015. Within this total, there will be a further shift in exports away from the European Union towards other faster-growing regions, mainly Asia.
The current account deficit worsened sharply in 2012 to 3.3% of GDP, approaching its highest level since 1980. This reflected the much larger trade deficit, and a large fall in investment income. Over the next few years, the current account deficit is forecast to narrow, but at a modest pace to 3.0% in 2013, 2.7% in 2014, and 2.4% in 2015.
Main sectors of the economy
Manufacturing is still a strong sector, but its relative share of total UK output has fallen in recent decades, and now accounts for only 10.5% of the whole economy. We expect manufacturing output to fall by 0.5% in 2013, followed by modest positive growth of 1.0% in 2014 and 1.2% in 2015.
Weak growth in world trade will limit the scope for increases in manufacturing exports over the next few years. Given that manufacturing is now productive and well managed, it has the potential to recover, and many firms have retained their skill bases during the recession. However the sector has experienced large productivity falls and this must be remedied.
Construction remains a weak and volatile sector in the UK economy, with a full-year decline of 8.2% in 2012, and a year-on-year fall of 9.3% in Q4 2012. In full-year terms, we predict that construction output will fall by a further 0.6% in 2013, followed by positive but weak growth of 1.0% in 2014 and 1.1% in 2015.
Service sector average growth is forecast at 1.1% in 2013, 2.1% in 2014, and 2.6% in 2015, a stronger performance than the other sectors. The service sector is by far the largest sector in the UK economy, and accounts for 77% of total output.
We predict that total UK unemployment will increase from 2.501 million (7.8% of the workforce) in Q4 2012, to 2.600 million (7.9% of the workforce) in Q2 2014, a net increase of 99,000 in the jobless total. This means that we are expecting an unemployment peak that is 50,000 lower than our previous forecast.
We also expect employment to increase, but any new jobs that are created will not be enough to absorb the increase in the number of economically active people.
This new forecast reflects the expectations that the increased flexibility and resilience of the UK labour market will be maintained. Nevertheless, we still expect moderate increases in the UK jobless total due to the following reasons:
- Some of the planned public spending cuts that are yet to be implemented will have an adverse impact on jobs.
- Low UK GDP growth will dampen demand for labour
- Productivity falls seen since 2008 will start to partially reverse, and this will add to the jobless total at a time when demand remains weak.
- Youth unemployment is forecast to increase from 974,000 in Q4 2012 to 995,000 in Q2 2014. We expect unemployment in the 16-17 age group to total around 205,000 (a jobless rate of 38.5%) in Q2 2014. Unemployment in the 18-24 age group is forecast to total around 790,000 (a jobless rate of 18.8%) in Q2 2014.
Public finances and inflation
Our public sector borrowing forecast for 2012/13 is £89.7 billion, £9.2 billion higher than the OBR predicted in December 2012.
In average full-year terms, we are now predicting annual CPI inflation at 2.7% in 2013, 2.3% in 2014, and 2.2% in 2015. Our new CPI inflation forecasts are higher than in December for 2013 and 2014.
For RPI inflation we are now predicting 3.4% in 2013, 3.0% in 2014, and 3.1% in 2015.
Interest rates and Quantitative Easing (QE)
We expect official UK interest rates to remain at 0.5% until Q4 2014, and then to rise modestly, to 0.75% in Q1 2015, and to 1.00% in Q2 2015. This means that any future interest rate increases are likely to occur later than we predicted in December.
In December, we thought that Quantitative Easing would not be increased further. We now predict that there will be a £50bn increase in QE to £425bn in Q2 2013, probably in May. Our view remains that increasing QE in the near future is unnecessary and would be unduly risky.
“Our new forecast highlights the challenges facing the UK economy over the months and years ahead. We have advocated reducing the deficit, but have for some considerable time said that this must be coupled with a plan for growth, together creating a new model economy that will allow businesses to create jobs, invest and export," John Longworth, Director General of the British Chambers of Commerce, said.
“Businesses up and down the country tell me they are confident and determined to grow. More must be done to support the ambitions of growing companies, many of whom will be the wealth creators of tomorrow.
“This is why we are calling for decisive action in the Budget. The government must make a serious effort to deliver on the many promises already made. This requires a focus on implementing measures that will boost growth, such as the movement of the business bank from rhetoric to reality, increasing the availability of access to finance, and delivering key infrastructure projects that will raise the confidence of businesses on the ground.
“Politicians across the entire spectrum need to show imagination and leadership. If they demonstrate the courage to put Britain’s economic priorities above politics, they can make a real difference in transforming our economy so that Britain can lead the way and attract enterprise and investment for years to come.”
David Kern, BCC Chief Economist, added: “Talk of a new recession is currently pessimistic. The ONS’ own data revisions raise doubts as to whether there was in fact a recession early in 2012. Following the 0.3% fall in Q4 2012, GDP is likely to increase by 0.1% in Q1 2013. We expect quarterly growth to increase very gradually over the next two years, but it will remain modest and below-trend for some time. In addition, we now expect GDP to return to its pre-recession levels early in 2015, and the squeeze on living standards will continue for a while longer.
“Our new forecast indicates that in 2012/13, and over the next three financial years, public sector borrowing will be higher than the OBR predicted in December. Our persistent fiscal challenges have contributed to the UK’s downgrading by Moody’s. Reducing the structural deficit, which remains unacceptably high, is proving a longer and more painful task than initially thought. But combining this policy with effective measures to boost growth is critical to avoid a vicious circle of weak growth and ballooning deficits.
“The debate about the UK monetary regime ahead of the arrival of Mark Carney as next Bank of England Governor has generated expectations that QE will be increased shortly, and that the MPC is now more willing to tolerate higher inflation and a much weaker pound. These perceptions are problematic. Adding to QE should only be considered if new threats emerge to the stability of the UK banking system. In the meantime, we believe that more QE would only provide marginal benefits for the economy, while heightening longer-term risks of financial distortions, bubbles and higher inflation.”
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