Short-term economic forecast up –  Chambers of Commerce

The British Chambers of Commerce (BCC) has raised its expectations for UK GDP growth to increase by 1.7% this year in its latest economic forecast.

The British Chambers of Commerce (BCC) has raised its expectations for UK GDP growth to increase by 1.7% this year in its latest economic forecast.
The business group has also predicted a rise of 2.2% for next year.
But despite the short-term positive outlook, the BCC has warned that the pace of growth will slow sharply over the medium-term as the Coalition Government’s tough deficit-reduction measures kick in.
It also predicts unemployment will increase over the next 18 months and will peak at 2.65m (8.3% of the workforce) in the first half of 2012.
The BCC has backed the Government’s commitment to slash Britain’s hugh budget deficit by focusing on curbing public spending, but warns the cuts must be coupled with a successful growth strategy to ensure the economy’s productive potential is supported.
David Frost, director general of the BCC, said: ”British business appreciates that sacrifices will have to be made in the next three 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.”
The BCC has also predicted ‘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 2012-13.
The organisation says it expects interest rates of 0.5% to be held until the second quarter of 2011, but by the end of 2011 it expects the bank rate to hit 1.75%.
BCC chief economist David Kern said: ”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 the 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 the 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 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.
”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.”


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