Launching the results of the August 2007 BCC Quarterly Economic Forecast, David Kern, Economic Adviser to the BCC, said:

"In reaction to large increases in interest rates, the August 2007 BCC Quarterly Economic Forecast is signalling a marked slowdown in the pace of UK economic activity. UK GDP growth is set to fall to a below trend pace towards the end of 2007, and growth is forecast to remain below trend during much of 2008.

"Year-on-year GDP growth is forecast to decelerate from an above-trend 3.1% in Q4 2006, to 2.0% in Q2 & Q3 2008. But there is a risk that the UK slowdown would be sharper. The main driver of the expected UK slowdown is the cumulative effect of five increases in Interest Rates since August 2006, and the likelihood that rates would go up further.

"Higher mortgage interest rates, and average earnings growth below RPI inflation, will intensify the squeeze on personal disposable incomes, and this will weaken household consumption. The recent strong growth in investment spending is set to decelerate, as the economy slows, while the strong pound will have an adverse effect on the external balance. The negative contribution of net exports to GDP growth is forecast to increase.

"Our central scenario assumes a further increase in Interst Rates to 6% in the next few months, and this would heighten the pressures for much lower growth and higher unemployment. The situation would be considerably worse if rates increase above 6%. Specifically, our calculations show that, if Bank Rate goes up to 6.25%, GDP growth is set to weaken much more sharply than in our central scenario, to an average of 1.8% in 2008, and to a yr-on-yr trough of 1.6% in Q2 2008.

"The August BCC forecast is predicting higher annual average GDP growth than envisaged in our May forecast. But this is entirely due to stronger than expected growth in Q1 & Q2 2007. From this higher base growth is set to slow down sharply. Our August central scenario is predicting a marked slowdown, from 2.8% in both 2006 & 2007, to 2.1% in 2008. Our May forecast predicted average GDP growth of 2.5% in 2007 & 2.0% for 2008.

"Since Q1 2006, UK GDP has grown on average at a pace of 3% per annum. But this period of above trend growth has come after six consecutive quarters of below trend growth, and it is difficult to support the view that the UK economy is hitting capacity constraints and serious risks overheating. Labour costs are under control, earnings growth has slowed, and the housing market is softening. There is no hard evidence so far that UK inflationary expectations are accelerating.

"Overall, the UK budgetary position remains stretched, and "stealth taxes" will continue to be a key instrument for dealing with the problem. Recent tax increases (notably the higher small business tax rate), and concern over future tax increases, will remain major factors likely to dampen business confidence. In spite of the better than expected 2006/07 outcome, most analysts think that the UK medium-term budgetary outlook has deteriorated, and this is largely due to structural factors."

David Kern concluded: "The cumulative adverse effects of five interest rate increases since August 2006 are set to worsen over the next year, as the pressures facing consumers and businesses intensify. A marked slowdown in UK activity is highly likely even if Interest Rates stay at 5.75%. The expected increase to 6% would cause further damage, and it is critically important that 6% should be the peak. There is now a genuine risk of overkill. We urge the MPC to adopt a cautious stance, and avoid an overreaction, which could cause serious economic damage.

"The economic climate facing UK businesses will become riskier and more difficult. We urge the Government to pay particular attention to the threats facing small businesses."

To receive a full copy of the report, email Jodie Reid on jodiereid@hertschamber.com.