The British Chambers of Commerce has today published its quarterly economic forecast, which highlights a significant worsening in UK economic prospects.

* British businesses are facing two very difficult years.

* There is now a distinct possibility of technical recession.

* UK unemployment is likely to increase by some 250,000-300,000 over the next two to three years.

* The longer the MPC waits before cutting rates, the bigger the danger that the situation will deteriorate, and the policy choices will become more difficult and unpleasant.

* The "golden rule", which prescribes that the Government will only borrow for investment over the economic cycle, is very likely to be breached.

* Government temptation to raise business taxes because it is running out of money, must be forcefully resisted.

British Chambers of Commerce Director General David Frost commented:

"Whilst a marked slowdown in activity is likely over the next 18 months, even if interest rates are cut when inflation peaks, the correct policy decisions are still needed to ward off the threats of a serious and prolonged recession.

"The longer the MPC waits before cutting rates, the bigger the danger that the economic situation would deteriorate."

Launching the August 2008 BCC Economic Forecast, David Kern, Economic Adviser to the BCC, said:

"Our quarterly economic forecast highlights a significant worsening in UK economic prospects. There is now a distinct possibility of technical recession.

"The level of UK unemployment is likely to increase to nearly 300,000 over the next few years, reaching almost two million. An increase above two million cannot be ruled out.

"Over the next two or three quarters, we expect UK GDP growth to be slightly negative or zero. Thereafter, we expect a shallow recovery, but the period of weak, below-trend, growth is likely to be prolonged, lasting until the final months of 2009 or early in 2010.

"Our view is that the threats to growth are more serious and more immediate than the risks of higher inflation. The UK economy urgently needs an interest rate cut to counter threats of recession.

"Our central scenario envisages that the UK Bank Rate would be cut to 4.75 per cent in quarter four 2008, followed by an additional cut to 4.50 per cent in quarter one 2009.

"A marked slowdown in UK activity is highly likely over the next 18 months, even if interest rates are cut in line with our central forecast. But, if the MPC decides not to cut rates in the next three to six months, growth prospects would be worse than in our central scenario.

"The Chancellor will probably confirm in his next Pre-Budget Report (PBR) that the Government’s fiscal rules will be altered, acknowledging that the original fiscal rules would be breached, at least temporarily. This would clearly undermine credibility and confidence in the short term. Nevertheless, we believe such a breach would be justified in order to help alleviate a very severe economic downturn.

"However, once the present crisis is over and the economy recovers, the Government must take determined measures to strengthen the UK’s medium term budgetary position. It must also establish a more credible fiscal framework, which is supervised by independent experts."