Growth forecast for 2013 is revised down from 1.9% to 1.2%
Headwinds from slowing global economy, crisis in the eurozone, and domestic austerity measures complicating UK recovery prospects
Continued reports of growth by many Chamber members suggests there is a reserve of business confidence and strong performance in the UK that can be harnessed
BCC calls for action to create a new model economy for the UK, with immediate measures to support business confidence and investment, a radical long-term growth plan, and a continued commitment to deficit reduction
The British Chambers of Commerce today (Friday) published its Q3 economic forecast. The business group has downgraded its predictions for UK growth in 2012 from +0.1% to -0.4%, and its predictions for 2013 from 1.9% to 1.2%. While many Chamber members have continued to report positive trading conditions and growth intentions in recent months, the deteriorating global environment has meant that the UK economy as a whole is now likely to shrink in 2012. The BCC believes that UK businesses have got what it takes to help the UK return to growth, but they can only do this if the government acts quickly and radically to introduce both short-term stimulus measures and radical long-term policies for growth.
BCC members continue to report positive trading conditions and say they have intentions to grow. But questionable UK GDP declines reported by the ONS, alongside worsening global conditions, mean that GDP will shrink in 2012. This is on the basis that there are no further revisions to the official statistics.
Although UK quarterly growth will be positive in Q3 and Q4 of this year, GDP growth will be in negative territory, at -0.4% for 2012 as a whole.
With the global economy likely to strengthen slowly over the next two years, we expect modest positive UK growth of 1.2% in 2013, followed by an improvement to 2.2% in 2014.
Main components of demand
Household consumption will remain subdued; after falling 1.1% in 2011 and 0.2% in 2012, it will return to positive growth in 2013 and 2014.
Business investment fell in Q2 2012, but in the first half of 2012 as a whole it recorded strong growth of almost 8% compared with a year earlier. In full-year terms, we expect business investment to grow by 4.5% in 2012, 5.0% in 2013 and 5.2% in 2013.
The much needed rebalancing of the UK economy towards net exports has been disappointingly slow. After good progress in 2011, there has been a setback in 2012, with exports likely to fall marginally and imports set to increase by 2.3% this year. In 2013 and 2014, we expect exports to grow a little faster than imports.
Main sectors of the economy
Official statistics showed that manufacturing output recorded quarterly declines in Q4 2011 and in the first two quarters of 2012. We expect manufacturing output to fall by 1.7% in 2012 overall, followed by positive growth of 0.9% in 2013 and 1.9% in 2014.
According to ONS data, volatile construction sector output fell sharply in the first two quarters of 2012, by a cumulative 8.6%. In full-year terms, we predict construction output to fall by 7.1% in 2012, followed by positive but weak growth of 0.3% in 2013 and 1.2% in 2014.
Service sector average growth is forecast at 0.7% in 2012, 1.5% in 2013, and 2.6% in 2014 – stronger than the expected growth of both manufacturing and construction.
We predict that total UK unemployment will increase from 2.564 million (8.0% of the workforce) in Q2 2012, to 2.750 million (8.5% of the workforce) in Q4 2013, a net increase of 186,000 in the jobless total. We now expect an unemployment peak at the end of next year that is 150,000 lower than in our previous forecast.
Our improved forecast reflects stronger than expected job figures in recent months. Nevertheless, we still expect significant increases in the jobless total for the following reasons:
1) many of the planned public spending cuts are yet to be implemented;
2) UK growth will be very weak; and
3) productivity falls seen since 2008 will be partially reversed. All of these factors will add to the jobless total at a time when demand will remain weak.
Youth unemployment will total some 1.048 million in Q4 2013. Unemployment in the 16-17 age group is forecast to total around 218,000 (a jobless rate of 39%) in Q4 2013. Unemployment in the 18-24 age group is forecast to total around 830,000 (a jobless rate of 21%) in Q4 2013.
Public finances and inflation
Our public sector borrowing forecast for 2012/13 is £106 billion, around £14 billion above the latest OBR forecast published in March 2012.
In average terms, we are now predicting annual CPI inflation at 2.7% in 2012, 2.1% in 2013, and 2.2% in 2014.
For RPI inflation we are now predicting 3.1% in 2012, 2.3% in 2013, and 2.5% in 2014.
Interest rates and Quantitative Easing (QE)
Weak growth prospects, both globally and in the UK, mean that official interest should remain at very low levels for at least another 15-18 months We expect official UK interest rates to remain at 0.5% until early in 2014, and then to rise modestly to 0.75% in Q1 2014, 1.00% in Q2 2014 and 1.50% in Q4 2014.
We believe the MPC will increase QE (now at £375bn) by £50bn, to £425bn, before the end of this year, and hold it at this level until early 2014. This would be misguided in our view. Additional QE would only provide marginal benefits for the real economy, and would involve long-term risks.
The MPC could make the current asset purchase programme more effective if, instead of purchasing gilts only, it also bought private sector assets, such as securitised business loans.
Britain needs to move toward a new model economy
British business wants to see bold action towards a new model economy that will help UK companies overcome the current global headwinds and lay the groundwork for a stronger future. This includes:
Swift action to support business investment, incentivise job creation, and jump-start construction, particularly in the housing sector. These measures will have to be funded either by making tough choices within the existing spending envelope, or by using the UK's market credibility to support limited extra borrowing. The BCC will set out more detailed proposals on how to create a new model economy in the coming weeks.
Radical long-term growth measures, including a state-backed business bank, a large-scale infrastructure investment programme, and more support to boost UK exports
Continued commitment to deficit reduction in a way that maintains the strong position of market credibility the UK has built up in recent years.
Commenting, John Longworth, Director General of the British Chambers of Commerce, said:
“A new model economy for Britain cannot be summed up as ‘Plan A’ or ‘Plan B’. Instead, it is about actively supporting the aspirations of the thousands of growing businesses across the UK, as well as our future economic prospects as a nation.
“Since the election of the Coalition Government, the BCC has supported deficit reduction, and a relentless focus on creating the conditions for businesses to thrive. Two years on though, the UK economy is stagnating, with headwinds from a slowing global economy, difficulties in the eurozone, pressure from domestic austerity measures, low business investment and volatile commodity prices all bearing down on our growth prospects.
“While many businesses out there are growing exports, seeking investment, and creating jobs, more needs to be done so the economy can move from a vicious cycle of stagnation to a virtuous cycle of higher growth and reduced borrowing. Companies now accept they are operating in a tougher and more uncertain environment, but they need an enterprise-friendly government with bold policies if they are to drive recovery.
“That’s why we are adding new calls for immediate and decisive action to our existing recommendations for long-term growth.
“Business wants a hybrid strategy that delivers both deficit-reduction and growth. This means a continued commitment to public spending cuts, support for the economy without a new and damaging consumer credit bubble, as well as a strong push to improve business access to finance and unlock massive private funding to renew Britain's infrastructure. Success will require both the government and the Bank of England to use their balance sheets – both to invest and for securitisation – at a time when Britain has both market credibility and rock-bottom borrowing costs.
“Politicians need to get some political backbone and show leadership. If they put Britain above politics, they will be rewarded for it in the long run. We need an economic action programme so that Britain can excel, and make its way in the world. We are a great country, as we demonstrated during the Olympics. We have the talent and the energy, but we need the political will to focus relentlessly on economic growth. It’s not that nothing else matters, it’s that without it, nothing else is possible.”
David Kern, BCC Chief Economist, added:
“After reported GDP falls in recent quarters, we expect a bounce back in the third quarter of 2012. However, hopes of a strong upturn may be overstated. Anecdotal reports do not support hopes that the London Olympics provided a major boost to UK growth. We assume positive UK growth of 0.5% in Q3 2012, 0.3% in Q4 2012, and a gradual improvement during 2013 and 2014. But the UK economy will face major obstacles over the next few years.
“Eurozone GDP, after recording nil growth in Q2 2012, is expected to shrink in Q3 2012 and to expand at a very weak pace in the following four to five quarters. The squeeze on living standards will ease if UK inflation continues falling in the near term, but recent strong rises in food and oil prices are posing new risks. The fall in inflation in 2013 will be smaller than the MPC expects, and UK GDP and consumer spending will only return to their pre-recession levels in 2014.
“The UK fiscal deficit is still unacceptably high. Abandoning the deficit-cutting plan will threaten the UK’s AAA rating, but persistent above-target borrowing figures, due to weak growth, will also put this in danger. Our new forecast predicts an overshoot in borrowing of some £14-17bn in each year until 2015, equivalent to 1-1.2% of GDP. Meeting the fiscal mandate of eliminating the structural current deficit will probably take two to three years longer to complete than envisaged last March. Nevertheless, if the Chancellor demonstrates that he remains committed to a firm fiscal plan, policies to boost growth would be consistent with maintaining strong market credibility.
“Additional QE should only be considered if the eurozone poses new threats to UK banks, and should not be used to prevent inflation from falling below the 2% target in 2013. A temporary fall in inflation below the target would be beneficial, since it would underpin real incomes and support demand, at a time when UK growth prospects remain very weak.”