British Chambers of Commerce – June 2009 Economic Forecast  

There are growing signs that the worst phase of the recession is behind us, according to the British Chambers of Commerce’s June Economic Forecast. However, the BCC warns that recovery is neither imminent nor guaranteed, arguing that prospects are still hazardous.  

Borrowing  

Britain’s fiscal position is unsustainable in the medium-term, with public sector borrowing of more than 12% in both 2009-10 and 2010-11, and with debt rising to dangerous levels.  The UK’s international credit rating will be under threat unless credible measures are taken to curb fiscal deficits and debt in the medium-term. The Government must present a realistic exit strategy with most of the emphasis on major cuts in spending programmes. There can be no sacred cows when it comes to making these cuts and politicians must be honest about the reality of the situation.  

Employment  

The BCC continues to predict that UK unemployment will rise to 3.2 million, or just over 10% of the workforce in the second half of 2010, unchanged from our March forecast. The greater flexibility of the UK labour market is likely to prevent a worse outcome in the current recession, with smaller falls in employment than in the early 1990s recession. It is critical to avoid measures threatening our labour market flexibility. 

GDP  

In annual average terms, the business group is now forecasting a GDP decline of 3.8% in 2009, followed by a very small rise of 0.6% in 2010. In March, the BCC predicted a GDP fall of 2.8% in 2009, and a 0.8% increase in 2010.  

Q1 2009 was probably the worst point in the recession. From now on it is expected that the pace of decline in UK GDP will moderate significantly, with much smaller quarterly falls in Q2 and Q3. In Q4 2009, a small quarterly GDP increase is expected; the pace of quarterly positive growth, although remaining low, is likely to improve slowly in 2010 and 2011.   

In terms of cumulative declines in GDP, the current recession is much worse than that of the early 1990s: 4.9% in 2008-09 versus 2.5% in 1992-93. Importantly, the current recession is still likely to be less severe than the early 1980s recession.  Interest rates  The BCC forecast assumes that the UK Bank Rate will remain at 0.5% until Q2 2010. Thereafter, very modest increases are assumed, with rates reaching 1.25% in Q4 2010. The forecast also assumes a further increase in the Asset Purchase Scheme to at least £150 billion. Additional increases should not be ruled out if recessionary pressures worsen.  

Commenting, British Chambers of Commerce Director General, David Frost, said:  “Since businesses will drive any sustainable recovery, it is vital to support wealth-creating firms. The Government must avoid additional business taxes, higher National Insurance Contributions, and policies that stifle enterprise and innovation. 

 “Manufacturing and exports will be at the heart of the recovery. We must ensure that companies can maintain their flexibility in order to hold onto their skilled employees. The UK’s skills base cannot be further eroded. 

 “The scale of debt facing this country is enormous. We cannot defer making hard decisions about cutting public expenditure. Business expects action and there should be no sacred cows.”    "The reduction in Government debt and borrowing, which will have to be implemented once the recession is over, should primarily entail curbing public spending growth in all areas except for vital infrastructure expenditure. Given the dire state of our public finances, tax increases are also unavoidable; these should mainly focus on indirect consumption taxes that are least likely to damage incentives." 

BCC Chief Economist, David Kern, added: 

“A return to positive GDP growth before Q4 2009, though unlikely, cannot be ruled out.  A temporary rebound driven primarily by the stock cycle will not produce a sustainable recovery, unless consumer spending, investment, and net exports start to improve. 

“The immediate risk is that the recession will worsen because stimulus is withdrawn too early. In the short-term, economic policy must remain expansionary. Longer-term inflation threats cannot be shrugged off and they need to be addressed with a credible exit strategy, but only after the real economy stabilises.   

"The UK medium-term economic outlook is grim and we are facing a period of austerity. The need to slash Government borrowing and reduce debt after the recession ends will inevitably dampen UK growth prospects for a considerable period. Over the next 4 or 5 years, the trend growth of UK GDP is likely to be considerably weaker than in the period proceeding the current recession.  

"Unless huge falls in UK capital investment are halted and reversed, our productive potential will be seriously weakened in the medium-term. Falling investment increases the danger that industry will find it difficult to boost output once the recession ends and demand starts recovering. The Government must ensure that wealth-creating businesses have adequate capacity to respond to an eventual upturn in demand when the recession ends.  

"The reduction in Government debt and borrowing, which will have to be implemented once the recession is over, should primarily entail curbing public spending growth in all areas except for vital infrastructure expenditure. Given the dire state of our public finances, tax increases are also unavoidable; these should mainly focus on indirect consumption taxes that are least likely to damage incentives."