• BCC lowers 2012 GDP growth forecast from 0.6% to 0.1%; 2013 growth forecast revised up, from 1.8% to 1.9%
• John Longworth: “Without a bold, enterprise-friendly government, the economy will continue to bump along the bottom for longer than we’d all like.”
The British Chambers of Commerce (BCC) today (Friday, 1st June) published its new Quarterly Economic Forecast, downgrading its prediction for UK GDP growth in 2012 to 0.1% (from 0.6%). Although there will be minimal growth this year, economic prospects will gradually improve, with growth of 1.9% in 2013 (revised upwards from 1.8%).
• After declining by 0.3% in Q4 2011, GDP recorded a further 0.3% fall in Q1 2012; this pushed the UK economy into technical recession. We question the ONS’ assessment, as most business surveys indicated positive Q1 growth and employment increased in the quarter.
• Ongoing problems in Europe will persist for some considerable time and cause difficulties for UK businesses. Net exports and business investment will be important drivers of UK economic growth in the next two to three years. But there will also be a modest improvement in consumer spending.
• Deficit reduction is crucial to maintain the UK’s market credibility, but growth must also be top of the government’s agenda.
• Given the fall in GDP in Q1 2012, and the continued difficulties in the eurozone, we believe that GDP growth for 2012 will be minimal at 0.1% (revised down from 0.6%). This will be followed by stronger growth of 1.9% in 2013 (revised up from 1.8%) and 2.3% in 2014.
• Growth in Q2 2012 is likely to be zero, or even slightly negative, due to the additional bank holiday for the Diamond Jubilee. But UK GDP growth is set to improve from Q3 2012.
• Household consumption will see a modest improvement from -1.2% in 2011, to positive growth of 0.7% in 2012, 1.7% in 2013, and 2.1% in 2014.
• We expect a strong recovery in business investment from 1.2% in 2011, to 4.3% in 2012, 7.3% in 2013, and 7.6% in 2014. UK exports will grow more rapidly than imports in both 2013 and 2014.
• We predict that UK unemployment will increase from 2.625 million (8.2% of the workforce) in Q1 2012, to 2.9 million (9% of the workforce) in Q3 2013, a net increase of 275,000 in the jobless total. This is in part down to to public sector spending cuts, many of which are yet to be implemented. In addition, falls in UK productivity seen since 2008 will be partially reversed in the next few years, and if demand in domestic and export markets remains weak, this will add to the jobless total.
• Youth unemployment will total 1.07m in Q3 2013. Unemployment in the 16-17 age group is forecast to total around 223,000 (a jobless rate of 41%) in Q3 2013. Unemployment in the 18-24 age group is forecast to total around 850,000 (a jobless rate of 23%) in Q3 2013.
Public finances and inflation
• Our public sector borrowing forecast for 2012/13 is £98bn, some £6bn above the latest OBR forecast published in March 2012.
• In average terms, our estimates for consumer inflation remain the same: 2.7% in 2012, 1.9% in 2013, and 2.2% in 2014. We estimate RPI inflation will be at 3.2% in 2012, 2.3% in 2013, and 2.6% in 2014.
Interest rates and QE
• Weak growth prospects, both globally and in the UK, will make it necessary to keep official interest rates at very low levels for at least another year. We expect rates to start increasing late in 2013, to reach 0.75% at the end of 2013 and 1.25% in Q2 2014.
• We expect the MPC to maintain the Quantitative Easing (QE) programme at its current level of £325 billion at least until Q4 2013. In recent weeks, there have been renewed demands for additional increases in QE, but we believe this would only be necessary in the event of a further shock to the financial system, for example a worsening of the situation in the eurozone.
• The MPC could make the current asset purchase programme more effective if, instead of purchasing gilts, it bought private sector assets.
Commenting, John Longworth, Director General of the British Chambers of Commerce, said:
“Our new forecast underlines the need for bold action to deliver growth. Businesses are busting a gut in an uncertain environment, and they will need to continue to do so. But if companies are to accept uncertainty as the new norm, then they must be met with a bold, enterprise-friendly government to enable them to grow in the long term. Without government working together with business, the economy will continue to bump along the bottom for longer than we’d all like.
“We want to see measures like the creation of a business bank, which would provide capital to new and growing companies; real domestic deregulation, and a moratorium on new European regulation that hinders businesses; and clear, long term strategies on aviation and energy to deliver more certainty to supply chains and investors. All of these measures that can be achieved while sticking to the aims of deficit reduction and crucially, maintaining the UK’s market credibility.
“There are also measures that will help insulate the UK from some of the risks in the eurozone. Investment in infrastructure to create robust rail, air, maritime, energy and digital networks could be privately funded or kick-started by the public sector, with pension funds and sovereign wealth funds able to purchase the assets when the projects are completed.
“We need growth, and we need it now. If the government works together with the private sector to create the right environment over the long term, we’ll be able to prove once and for all that bold businesses can propel us forward, out of stagnation and firmly on the road to recovery.”
David Kern, Chief Economist at the British Chambers of Commerce, said:
“With negative growth in the first quarter of 2012, and renewed difficulties in the eurozone, we have downgraded our forecast for GDP in 2011 to 0.1%. But UK GDP growth is set to improve from Q3 2012, averaging 0.5% per quarter until the end of 2013. As inflation falls, and the squeeze on living standards eases, our estimate for growth in 2013 has been revised to 1.9% (from 1.8%).
“Though growth will return, it will be over a longer period than expected. GDP and consumer spending will only return to pre-recession levels in the second half of 2014 or early in 2015. Though growth might be low, but the economy will expand in spite of the difficulties continuing to face the eurozone. However if there is a disorderly euro breakdown, then growth would very likely be lower.
"Our growth forecasts are lower than those of the OBR, and this means that meeting the deficit reduction target may take a year longer than the OBR predicts. Assuming no additional fiscal stimulus, our borrowing forecasts are £6bn higher than those of the OBR in 2012/13 and 2013/14, and £7bn higher in 2014/15. Even so, the forceful measures adopted by the Chancellor since June 2010, have earned him considerable credibility in the financial markets, and he is now in the position to increase spending on growth-enhancing policies without endangering Britain's AAA rating. This is necessary, because persistent stagnation threatens to damage the economy’s long-term productive potential.
“Since the main fiscal mandate relates to the current structural deficit, we believe that investment spending, or time-limited policies that do not affect the structural deficit, are most likely to be accepted by the markets. Alongside investment in infrastructure, policies that support job creation and enterprise, such as cutting NICs, or raising capital allowances are most likely to benefit the economy. As long as the Chancellor remains committed to implementing the planned spending cuts, a fiscal stimulus totalling £5-6bn would be consistent with maintaining strong UK market credibility.”