The British Chambers of Commerce (BCC) today (Tuesday) published its new quarterly Economic Forecast, ahead of the Bank of England’s Monetary Policy Committee (MPC) meeting on Thursday and with just over two weeks until the Budget. The BCC forecast reduces expectations for UK GDP growth in 2011 to 1.4% (from the December forecast of 1.9%), but raises its prediction for 2012 growth to 2.3% (from 2.1%). The BCC also increases its predictions of unemployment for early 2012 to 2.65 million, from the December forecast of 2.6 million.

·         The downward revision to 2011 growth is mainly due to the unexpected fall in GDP in Q4 2010; this also accounts for lower economic growth in 2010 than had been previously predicted. An additional factor leading to lower 2011 growth is the likelihood of an increase in interest rates in Q2, earlier than envisaged in December.

·         Two main factors account for a higher jobless forecast. Firstly, the larger than expected increase in unemployment in Q4 2010; and secondly, the significant rise in economic inactivity, which increases the likelihood that more people will look to return to the workforce. An expected interest rate increase as early as May 2011 could also add to the jobless total.

·         But the current attempts to rebalance the economy towards the private sector will improve the UK economy’s longer-term prospects. Britain’s future success will depend on the relentless pursuit of policies aimed at strengthening the private sector and improving the economy's productive potential.

Commenting, David Frost, Director General of the British Chambers of Commerce, said:

“British businesses will welcome the Government’s desire to boost enterprise, and reduce red tape, but these words must be backed by action. While we support efforts to reduce the UK’s deficit, these measures alone will not deliver a sustainable recovery. The Budget must commit to explicit policies that will help firms thrive. This is the time for the Government to deliver on its promises and ensure businesses can invest, export and create jobs. The Government is right to persevere with implementing its tough deficit-cutting plan and we expect the private sector to absorb these measures, given the right supportive policies in the Budget. This would allow growth to strengthen towards the end of this year and into 2012.

“We must avoid heaping new regulatory burdens and business taxes on firms at all costs. Measures that damage initiative, enterprise, and innovation should be scrapped. Business is willing and able to drive the recovery. But it can only do so if the Government will back its words with deeds. Without credible growth enhancing policies, there is a clear danger that the recovery will fizzle out.”

Chief Economist at the British Chambers of Commerce, David Kern, added:

“Following the temporary relapse in Q4 2010, we expect a rebound in GDP growth to 0.6% in Q1 2011, as the effects of the severe weather are reversed. But the next few quarters will be risky and growth will likely slow in Q2 and Q3, as the austerity plan is implemented more forcefully. While a new recession can be avoided, economic policy must focus on limiting the risks of a new major setback. Despite concerns around inflation, it is important for the UK to maintain an expansionary monetary policy with very low official interest rates until later in the year.

“Given the shift of opinion within the MPC, we assume interest rates will increase from May, but we believe this will be premature and risky in view of the fragility of the recovery and tough fiscal measures expected in the Budget. We assume rates will be raised gradually, to 1.25% at the end of 2011 and to 2.5% in the final months of 2012. While such increases in official interest rates will not push the economy into a new recession, they will slow growth and add to the jobless total.

“Sharp increases in the prices of oil, food and other commodities could result in weaker growth and higher inflation. The UK faces major medium-term challenges, with UK growth limited over the next few years by spending cuts, consumer debt and measures to strengthen our banks. Over the period to 2015, UK GDP is likely to grow on average by just over 2% per annum, well below the 3% average growth recorded in the 15-year period 1993-2007. But there is room for cautious optimism. If the deficit-cutting plan is implemented successfully, there are realistic prospects that trend growth of UK GDP will increase to 2.5-2.7% per annum after 2015."

The main features of the forecast include:

·         The BCC forecasts GDP growth of 1.4% in 2011 and 2.3% in 2012, after 1.3% in 2010. In our previous forecast we predicted growth of 1.8% in 2010, 1.9% in 2011, and 2.1% in 2012. If the deficit-cutting strategy achieves its aims, it could put the UK on a path of sustainable and affordable recovery, and could help create a “leaner and fitter” economy.

·         Our new forecast envisages that total UK unemployment would increase from 2.49 million (7.9% of the workforce) in October-December 2010, to 2.65 million (8.3% of the workforce) in the early months of 2012, a net increase of some 160,000 in the jobless total. We are now predicting a higher level of unemployment early in 2012. In December we predicted an increase to 2.6 million in the first half of 2012. Our new unemployment forecast compares with a jobless peak of just over 3 million (10.7% of the workforce) in the recession of the early 1990s.

·         CPI inflation is likely to rise further in the near term, possibly reaching 4.5%, and will remain well above 3% until the final months of 2011. But we expect sharp falls in inflation in 2012, as the effects of the temporary factors that are currently pushing up inflation fade. In annual average terms we predict CPI inflation at 4.2% in 2011 and 2.3% in 2012, after 3.3% in 2010. For RPI inflation we predict 5.3% in 2011, and 3.5% in 2012, after 4.6% in 2010. The new forecasts are considerably higher than those made in December.

·         We expect the Government’s deficit-cutting measures to be carried out broadly according to plan. The new forecast envisages Public Sector Net Borrowing (PSNB) falling to £141.3bn (9.6% of GDP) in 2010-11, £113.4bn (7.3% of GDP) in 2011-12 and £86.3bn (5.3% of GDP) in 2012-13. On the basis of recent figures, there are realistic prospects that the deficit would fall slightly faster than the Office of Budget Responsibility (OBR) predicted in November 2010.

·         Given the recent shift of opinion within the MPC towards a more hawkish line, we assume that the MPC will start raising official interest rates from their current 0.5% level in May 2011. However, we are concerned that such a move would be premature, in view of the fragility of the recovery and the tough fiscal measures that will be announced in the Budget on 23 March.