By Marcus Leach

The British Chambers of Commerce (BCC) today published its new Quarterly Economic Forecast, downgrading its prediction for UK GDP growth in 2011 and 2012.

Though growth is expected to be weaker over the short-term, the new forecast predicts a gradual improvement, and warns against unjustified gloom about the UK’s economic prospects.

However, this is the third time the forecast has been reduced this year alone, and it now expects the economy to expand just 1.1% in 2011, compared with its 1.3% estimate in June and 1.9% at the start of the year.

Key features of the forecast include:

• GDP growth over the coming quarters will be modest: 0.3% in Q3 2011 and 0.5% in Q4 2011, rising to 0.6% from Q1 2012 onwards. The BCC’s forecast remains lower than the Office for Budget Responsibility’s (OBR), and many others.

• The BCC expects UK GDP growth of 1.1% in 2011 (down from 1.3%) and 2.1% in 2012 (down from 2.2%), and consumer spending to fall by 1.0% in 2011 (double the previous forecast of a 0.5% fall). UK prospects will improve gradually, with GDP strengthening in 2012 and beyond, rising to 2.5% in 2013. The forecast also predicts annual CPI inflation of 4.4% in 2011 (from 4.5%) and 3.0% in 2012 (from 2.7%).

• Unemployment is now forecast to peak in Q4 2012, at 2.62 million; in June, we predicted a slightly lower jobless peak of 2.6 million in Q2 2012. But, given the difficult economic background, the expected rise in unemployment is moderate, and the UK labour market is set to remain quite resilient overall.

• Lower growth prospects, both globally and in the UK, means that official interest rates will need to stay at very low levels for longer than previously envisaged. We expect rates to rise in August 2012, reaching 1% in Q4 2012 and 2.25% in Q4 2013.

“The challenges faced by the UK economy are more difficult than first thought at the beginning of the year," David Frost, Director General of the British Chambers of Commerce, said.

"Growth will be slow, inflation will remain high, and the number of those out of work will increase. Despite this, there is no need for doom and gloom. We expect prospects to improve over the medium-term, and believe that the UK has the potential to recover and thrive. But this will depend on creating the right conditions for businesses to grow.

“The government is right to reduce the deficit, but these measures must be matched by policies to stimulate growth. The main drivers of UK growth over the next two years will be net exports and, to a lesser degree, business investment. But the re-balancing of the economy towards net exports and investment is not yet happening at an adequate pace.

“We have to get the economy onto a more sustainable long-term footing, and it is business that will help us achieve that. For the government, that means taking a serious look at the infrastructure that supports our businesses, from the education system to transport links, as well as reducing red tape and reforming the planning system, to allow firms to expand and grow. If we don’t get these policies right, we risk any recovery being weak and short-lived.”

David Kern, Chief Economist at the BCC, said that the UK's economy is now facing some serious challenges.

“With global prospects worsening, and the UK growing slower than previously envisaged, the economy faces serious challenges," he said.

"There are painful adjustments ahead, with a decline in living standards, though the recent pessimism from some quarters is unwarranted. UK growth with stay positive, but it won’t be until 2013 that we will see GDP returning to pre-recession levels, and 2014 until consumer spending recovers to its Q1 2008 level.

“In addition to maintaining low interest rates, if weak economic growth continues we expect the MPC to consider increasing the Quantitative Easing (QE) programme from £200 to £250 billion. There may also be a case for action to stimulate stronger bank lending. Regulators could consider temporarily relaxing bank capital requirements, or other measures, which could promote the availability of credit to viable businesses that want to invest.

“Future growth will be constrained by the consequences of the credit bubble and the banking crisis. Reducing high debt levels will be painful and inevitably result in a prolonged period of relatively low economic growth. Although the policy options available are limited, authorities must focus on policies that will enhance the economy's growth potential and enable the UK to regain the productivity losses incurred during the recent recession.”

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