Proactive Policies Needed To Counter Threats To Uk Businesses
12 May 2008 in Chamber News
Launching the British Chambers of Commerce's May 2008 Quarterly Economic Forecast, David Kern, Economic Adviser to the British Chambers of Commerce, said: British businesses are facing two difficult years in 2008 & 2009. Prospects for 2009 have worsened. While recession is unlikely, and can certainly be avoided, the marked slowdown in the pace of economic activity will be more prolonged than initially thought. The MPC and the Government must adopt pro-active policy measures aimed at countering the threats to growth. The new BCC Quarterly Forecast is signalling a significant slowdown in the pace of economic activity over the next 6-7 quarters. UK GDP growth is likely to remain below trend until the final months of 2009. In full-year terms, average UK GDP growth is forecast to plunge from 3.0% in 2007 to 1.7% in 2008, and 1.6% in 2009. Our February forecast predicted a moderate recovery in growth next year, from 1.7% in 2008 to 2.0% in 2008. Quarterly UK GDP growth is expected to fall to a level only marginally above zero over the next 6-9 months. Year-on-year UK GDP growth is forecast to plummet, from a strong above-trend pace above 3.0% in Q2 & Q3 2007, to a very weak pace of about 1% in Q4 2008 & Q1 2009. In addition to adverse global prospects, resulting from the credit crisis, the main negative UK influences are falling house prices, which will heighten the squeeze on UK personal disposable incomes, and the worsening capital shortfalls facing the UK banking sector The main driver of the UK GDP slowdown is expected to be a very sharp deceleration in consumer spending growth, in reaction to falling house prices and the squeeze on household disposable incomes. In annual average terms, household consumption growth is forecast to plunge from 3.0% in 2007 to 1.1% in 2008, before edging up to 1.4% in 2009. A worsening external deficit, and lower growth in investment spending, are likely to be additional contributory factors to lower UK GDP growth in 2008 & 2009. Interest rate expectations have stabilised since our February forecast. Our central scenario envisages that UK Bank Rate would be cut to 4.25%-4.50% before end-2008. Additional cuts to 4.00% or lower, though possible if the economic slowdown worsens, are too risky given the danger that sterling would fall very sharply. A marked slowdown in UK activity is highly likely over the next 18 months, even if rates are cut in line with our central forecast. UK interest rate cuts would pose some dangers to inflation. But, given the overriding threats to growth, some risks to inflation will have to be accepted in the short term, particularly since significant fiscal expansion is not a realistic UK option. Waiting unduly before easing further would pose unacceptable threats to growth. The longer the MPC waits now, the bigger the danger that the situation would deteriorate, and the policy choices would become more difficult and more unpleasant later in the year. UK public finances remain stretched. There has been an improvement in recent months, and the official fiscal forecasts for 2008/09 will probably be met. But the new UK economic cycle is starting with large current deficits and with excessive levels of total borrowing. Given the expected sharp slowdown in UK economic growth, the fiscal position is unlikely to improve significantly from 2009 onwards, as the official forecasts envisage. There is a clear risk that the Government’s fiscal rules would be breached in the next 2-3 years. While breaching the fiscal rules would undermine credibility and confidence, such a breach would nevertheless be justified if it helps to alleviate a very severe economic downturn. At the very least, the automatic stabilisers, which increase the size of the budget deficit when the economy slows, must be allowed to do their job and mitigate the downturn. But, once the economy recovers, the Government must take more determined measures to strengthen the UK’s medium term budgetary position The UK business sector has remained relatively resilient so far. But recent tax changes have undermined confidence. Weaker domestic demand will exacerbate the adverse effects on UK businesses, particularly if banks tighten credit. Although the US credit crunch is easing, the UK banking sector remains under pressure. UK businesses remain concerned that the tax burden facing them is set to increase, through new “stealth taxes” and through allowing local authorities to increase business taxes. UK businesses will face a difficult and risky climate over the next year. The political pressures on the Government to compensate those losing from the abolition of the 10% income tax band, could pose new risks for business. Demands for large increases in the minimum wage, to compensate for the abolition of the 10% income tax band, could be particularly dangerous at a time of sharp slowdown in the pace of growth. The immediate policy priority is to limit the risk of a major economic downturn. It is vital to ensure that the smooth flow of credit to UK businesses is not damaged by acute problems in the mortgage market and in the financial sector. Small businesses are particularly vulnerable when the banking sector is under pressure, and the Government may have to take special measures to support them if the credit crunch worsens.