Recovery Depends Critically On Business-Friendly Environment Launching the May 2006 BCC Quarterly Economic Forecast, David Kern, Economic Adviser to the BCC, said: "Uninterrupted growth in every quarter since 1992 is a major economic achievement for the UK. But the UK's productivity is very mediocre: the economy suffers from a large budget deficit and shortfalls in skills, innovation and infrastructure.

The vast and relentless regulatory burden, particularly in the labour market and the threat of higher taxes are holding back the economy. The UK's recovery depends critically on a business-friendly environment. " In this forecast the BCC has raised its UK GDP growth forecasts, from 2.2% to 2.3% for 2006 and from 2.4% to 2.5% for 2007, after 1.8% in 2005. Mr. Kern said: "The UK economy is past its worst and growth is edging-up slowly towards trend. But our central forecast assumes that UK growth will remain mediocre. Many risks persist and a reversal cannot be ruled out: unemployment is set to increase further and the higher minimum wage will add to the jobless total." "The modest improvement in UK growth depends critically on some rebalancing of the economy towards exports and investment. Such a rebalancing is possible but cannot be guaranteed. Household consumption growth is set to remain below its long-term average and below the expected growth in GDP. But unless investment and exports continue to grow above the rate of GDP growth the UK recovery could go into reverse. With imports expected to grow more strongly than exports, in both 2006 and 2007, GDP growth could disappoint, even if exports expand strongly.

Household consumption is likely to grow slower than GDP, by 2.0% in 2006 & 2.2% in 2007, compared with 2.0% & 2.3%, respectively, in our February forecast, after 1.7% in 2005. Service sector output growth is forecast at 2.8% in 2006 & 2.7% in 2007, after 2.8% in 2005. Manufacturing output growth is forecast at 0.6% in 2006 & 1.6% in 2007, after negative growth of -1.1% in 2005. Public finances have improved in recent months, but the UK budgetary position will remain stretched over the medium term. HM Treasury's decision to extend the current economic cycle to 2009 should enable the Chancellor to meet his Golden Rule in this cycle. But with the net debt ratio set to approach the critical level of 40%, there is still a clear risk that tax increases totalling some £10bn will be needed in the next few years. Concerns over future tax increases are seriously damaging business confidence. We expect CPI inflation to average 2% in both 2006 and 2007, in line with the official target, after 2.1% in 2005. Volatile oil and energy prices will remain an unsettling factor. UK earnings growth is set to remain broadly around present levels in 2006. UK productivity growth slowed last year, from 2.2% in 2004 to 0.8% in 2005 for the whole economy, and from 6.1% to 2.5% in manufacturing. Some of the 2005 slowdown may have been cyclical, but there is no evidence of sustained long-term productivity improvement