British Chambers of Commerce – September 2009 Economic Forecast

The British Chambers of Commerce (BCC) has today (Sunday) published its September 2009 Economic Forecast. Despite a further downward revision in GDP expectations for this year, the BCC is more upbeat about economic growth in 2010, and has reduced its forecast for peak unemployment.

  

The main features of the BCC forecast are:

The UK will see a large GDP decline of 4.3% in 2009, followed by positive growth of 1.1% in 2010 and 1.9% in 2011. In June we predicted a 3.8% GDP fall for 2009 and a small 0.6% increase in 2010. 

The current recession - recording peak to trough declines of 5.5% - is much worse than the recession of the early 1990s. However, it is less severe than the early 1980s recession, when GDP recorded cumulative falls of 6.0%.         

Further big increases in unemployment are expected, but at a reduced pace. Unemployment is likely to rise from 2.43 million to a peak of just over 3 million, or 9.6% of the workforce, in mid-2010. In June we predicted unemployment would hit 3.2 million. 

Public sector borrowing is forecast to total some 12.5% of GDP in 2009-10 and 2010-11. Public sector debt is set to rise to dangerous levels in the next few years, in excess of 80% of GDP.

The BCC believes that the MPC will use the full £175bn allocated to the Quantitative Easing (QE) programme. Another increase in the size of the programme, to at least £200 billion, will probably be needed to ensure that the economy does not falter.  

British Chambers of Commerce, Director General, David Frost, said:  "All the political parties must demonstrate that they recognise the vital role of wealth-creating businesses in driving a sustainable economic recovery.

 “The UK’s recovery requires a thriving business sector, so it is vital that new business taxes, higher National Insurance contributions, and any measures that may damage enterprise and job creation are avoided.  "The painful but necessary reduction in government debt and borrowing, which will have to be implemented soon, should entail curbing public spending in all areas, except for vital business infrastructure expenditure. Given the perilous state of our public finances, we cannot afford to ring-fence other spending categories, no matter how desirable it may be. Reform of the public sector must be part of a credible plan to cut spending.”

 David Kern, Chief Economist at the BCC, added:  "The upturn in the economy has probably already started and we could see a relatively strong bounce-back in the next few quarters. But sustaining the recovery will be very challenging and the risks of a relapse are high.  

"For a recovery to be sustained, consumer spending, investment, and net exports need to strengthen. However, the UK economy faces serious challenges that could limit the pace of recovery in the next few years, including: overly indebted consumers, high unemployment, a fragile banking sector, persistent weakness in bank lending, weak growth in the eurozone, and most importantly, the need to slash government borrowing and curtail debt. These problems will inevitably dampen UK growth prospects for a considerable period. 

“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 multi-year fiscal plan that the markets will accept as realistic, and that avoids measures which could damage the economy’s productive potential. 

“While we expect a gradual improvement over the next two years, the pace of UK expansion is likely to be weak by pre-recession standards. It is critical that wealth-creating businesses have adequate capacity to respond to an upturn in demand when the recovery strengthens.”