By Claire West
The British Chambers of Commerce (BCC) has published its latest Quarterly Economic Forecast, which envisages five consecutive quarters of negative GDP growth and estimates that total government borrowing may hit £111 billion. The Forecast reports that:
• UK public finances have deteriorated sharply and the fiscal deficit is forecast to be considerably bigger than Government predictions;
• Total Government borrowing may total £111 billion in 2009/10, or 7.6 per cent of GDP, a huge deficit which entails serious risks for the UK;
• Five consecutive quarters of negative GDP growth expected;
• Distinct risk of temporary deflation at the end of 2009;
• Unemployment will hit nearly three million by mid 2010;
• If the markets interpret Government’s fiscal strategy as reckless, the pound may plummet to dangerous new lows;
• A credible stimulus package must focus on business tax cuts with reductions in National Insurance the most effective means of avoiding sharp unemployment rises; and
• Government may have to play a direct role in provision of finance to business if credit markets remain paralysed.
British Chambers of Commerce, Director General, David Frost, commented:
“Britain is facing an extraordinary period in its economic history. Current circumstances are unique, and the global credit crisis is entering a critical phase.
“Monetary policy alone is not enough to help businesses and consumers under unprecedented financial pressure. An effective fiscal package, with tax cuts for businesses at its very core is paramount.”
Chief Economist for the BCC, David Kern, said:
“British business will face a painful and prolonged UK recession in the next few quarters. The economic climate will be exceptionally difficult and threatening.
“UK public finances are in a dreadful state. Public sector net borrowing will inevitably balloon in the short term.
“We predict five consecutive quarterly GDP declines.
“A rise in unemployment to almost 3 million by 2010 is very probable in the current recession.
“Annual CPI inflation is forecast to fall well below target in the final months of 2009. UK inflation is likely to be below 1 per cent at that time, and there is a distinct risk that the UK would experience temporary deflation at the end of 2009.
“Monetary and fiscal policy must now run in tandem.
“If the Government’s fiscal stimulus is inadequate, or lacks credibility, the UK recession will be worse.
“The markets’ reaction to the fiscal stimulus, due to be announced by the Chancellor in his Pre-Budget Report, will depend on whether he can present a credible medium-term strategy for strengthening the UK’s budgetary position once the present crisis is over.
“If the markets interpret the UK measures as being reckless, the pound may plummet to dangerous lows, and yields on gilts could rise sharply, forcing the Government to change course, frustrating its policy aims.
“The Chancellor must also establish new and more objective fiscal rules than the ones that are currently being discarded, and independent experts must assess these new rules.
“Given the urgency of the economic crisis and the Chancellor’s limited room for manoeuvre, we believe the stimulus package should initially be focused on tax cuts. Lower business taxes, and reductions in NIC rates, are the most effective methods for limiting the threat of sharp unemployment increases.
“The vital flow of bank finance to businesses is crucial, particularly smaller companies. If credit markets remain paralysed the Government may have to play a direct role, either in guaranteeing business finance or in providing it directly.”