By Claire West

BCC upgrades UK short-term economic prospects

The British Chambers of Commerce (BCC) has published its latest Economic Forecast today and raises its expectations for UK GDP growth to 1.7% for this year, and to 2.2% for 2011.

Despite the more positive short-term view, the business group also predicts that the pace of growth will slow sharply over the medium-term as the Coalition Government’s tough deficit-reduction measures kick in.

While the BCC commends the Coalition’s commitment to slash Britain’s huge budget deficit by focusing on curbing public spending, the organisation argues that the cuts must be coupled with a successful growth strategy, which ensures the economy’s productive potential is supported.

The main features of the Forecast include:

•BCC is now forecasting GDP growth of 1.7% in 2010, 2.2% in 2011 and 1.8% in 2012. In June, we predicted growth of 1.3% in 2010 and 2.0% in 2011. The Coalition’s austerity programme and the worsening global background are likely to dampen Britain’s medium-term prospects.

•Unemployment will increase over the next 18 months. This forecast envisages unemployment rising from 2.46 million to a peak of 2.65 million (8.3% of the workforce) in the first half of 2012.

•With tax receipts showing surprising buoyancy in recent months, we expect the deficit to fall faster than planned. We predict large declines in public sector net borrowing (PSNB), to £144bn (9.7% of GDP) in 2010-11, £110bn in 2011-12, and £83bn (5.1% of GDP) in 2012-2013.

•CPI inflation will remain above the 2% target until the end of 2011, but it is likely to fall below 3% over the next year. In annual average terms we forecast CPI inflation at 3.2% in 2010, 2.7% in 2011 and 1.7% in 2012. RPI inflation is forecast to average 4.7% in 2010, 4.1% in 2011 and 2.8% in 2012.

•The Monetary Policy Committee is expected to hold interest rates at 0.5% until the second quarter of 2011. By the end of 2011, we expect the Bank Rate to hit 1.75%.

Commenting on the UK’s economic outlook, David Frost, the BCC’s Director General, said:

“British business appreciates that sacrifices will have to be made in the next few years, as the tough but necessary austerity measures begin to bite.

“Business accepts that reducing the deficit, with a clear focus on spending cuts, is vital in order to restore confidence, international credibility and stability. However, deficit reduction on its own will not deliver a sustainable recovery.

“There must be a relentless focus on ensuring that business is able to deliver growth and create employment. We need policies that rebalance the economy towards wealth-creating businesses, and enable the private sector to invest, export and create new jobs. Failure to get this right poses the biggest risk to recovery.”

BCC Chief Economist, David Kern, added:

“UK GDP was very strong in the second quarter of 2010 and the pace of growth will remain satisfactory in the second half of this year. Activity will be supported in the short-term by the cumulative impact of the huge injections of stimulus during the recession, the earlier sharp falls in sterling, and the rebuilding of stocks.

“However, we expect a sharp slowdown in the pace of growth to start in the first quarter of 2011, as VAT increases to 20% and tough spending cuts are implemented. The need to significantly cut the deficit, strengthen the banking sector, and reduce personal debt will inevitably limit growth until the middle of the decade. Over the next four to five years, GDP growth is likely to average just under 2% per annum, considerably less than the 3% average growth recorded in period between 1993 and 2007.

“If successful, the forceful deficit-cutting strategy announced in the Emergency Budget would put the UK on a path of sustainable and affordable recovery, and could help create a leaner and fitter economy. But, the scale of fiscal retrenchment, and the decision to cut the deficit at an accelerated pace, will inevitably increase dangers of a double-dip recession. The new policy faces obstacles, and will only succeed if it is accompanied by a coherent growth strategy.

“The Bank of England cannot ignore the risk that inflationary expectations may worsen, and its own credibility will be questioned if inflation stays for too long above the 2% target. However, threats of a setback to growth remain more serious than risks of a surge in inflation. Given the balance of risks facing the economy, we urge the MPC to keep interest rates at 0.5% until the second quarter of 2011 at the earliest, and to consider further increases in the Quantitative Easing programme if the economy weakens.

“Recent improvements in the UK labour market mask worrying developments, which pose serious threats to Britain’s productive potential. Unless the labour market remains flexible during the recovery, and private sector employers are encouraged to expand, there is a risk that falling productivity would damage Britain’s medium-term growth prospects. Inactivity must decline, full-time employment needs to grow, and private sector employment must increase.”