UK GDP growth will be minimal until mid-2012, and then improve gradually
• The impacts of the eurozone debt crisis have been more serious than previously predicted. On this basis, the BCC has revised down its forecasts for GDP growth.
• Growth over the next few years, both globally and in the UK, will be constrained by the on-going fallout of the financial crisis. Debt levels are still too high. The process of de-leveraging will be difficult, and will result in a relatively long period of low growth.
• Growth will be minimal in Q4 2011, and the first two quarters of 2012 (0.1 - 0.2 % per quarter). Thereafter, we expect gradual improvement, but UK growth is likely to remain weak by historical standards until the second half of 2013.
• The BCC expects UK GDP growth of 0.9% in 2011 (down from 1.1% in our September forecast), 0.8% in 2012 (down from 2.1%), and 1.8% in 2013 (down from 2.5%).
• We expect consumer spending to decline by 1.2% in 2011, followed by modest growth of 0.5% in 2012 and 1.6% in 2013. Consumer spending growth is likely to remain consistently slower than GDP growth.
Unemployment will increase to 2.77 million
• Our new forecast envisages that total UK unemployment will increase from 2.62 million (8.3% of the workforce) in July-September 2011, to 2.77 million (8.7% of the workforce) in Q4 2012, a net increase of some 150,000 in the jobless total.
• Unemployment in the 16-17 age group is forecast to total around 235,000 (a jobless rate of 42%) in Q4 2012.
• Unemployment in the 18-24 age group is forecast to total around 840,000 (a jobless rate of 22.5%) in Q4 2012.
Interest rates will remain low, and the QE programme will be increased to £325 billion
• Weaker growth prospects, both globally and in the UK, will make it necessary to keep official interest rates at very low levels for longer than previously envisaged.
• Interest rates will remain at 0.5% until at least the fourth quarter of 2012, and then increase modestly, reaching 1.5% in Q4 2013.
• With UK growth likely to be very low in the next two to three quarters, and with the eurozone likely to record negative growth in the near future, we expect the Monetary Policy Committee (MPC) to increase the Quantitative Easing (QE) programme to £325 billion, from £275 billion.
• On its own, more QE will not suffice. The MPC should reassess its reluctance to purchase private sector assets and actively support the credit easing measures that the Chancellor is expected to announce in the Autumn Statement.
Public finances and inflation
• Our public sector borrowing forecast for 2011/12 is £123.9 billion. This is only £2 billion above the OBR’s forecast of £121.8 billion made in March 2011. But, as a result of weaker economic growth than previously predicted, we expect the gap between actual borrowing and the OBR forecast to widen in the following two years, with excesses of £10 billion in 2012/13 and £17 billion in 2013/14.
• In average terms, we are now predicting annual CPI inflation at 4.5% in 2011, 3.3% in 2012 and 2.0% in 2013. For annual average RPI inflation, we are now predicting 5.2% in 2011, 3.5% in 2012 and 2.3% in 2013.
Commenting, John Longworth, Director General of the British Chambers of Commerce, said:
“The challenges facing the UK economy have grown in recent months. Uncertainty surrounding the eurozone will delay a significant upturn in growth until late in 2012. We expect inflation to fall sharply, which is positive news for businesses and consumers, but we will be faced with rising unemployment for some time to come.”
“Despite our prediction of slow growth, there is no need for doom and gloom. The UK economy has the potential to recover and thrive. Our economic prospects will improve, but not overnight.
“A strong recovery relies on creating the right conditions for growth. Companies need the best possible environment to generate wealth and create jobs.
“Business is clear that the government must stick to its deficit reduction plans. Yet there is room for the Chancellor to change spending priorities, and focus more of our existing budgets on improving infrastructure, helping businesses to invest, and support for exporters.
“We all know that the public sector’s share of economic activity will shrink over the next few years. Bold measures that support business growth and encourage enterprise are absolutely fundamental to our prospects for recovery."
David Kern, Chief Economist at the British Chambers of Commerce, said:
“The immediate outlook is challenging and, though we believe a recession will be avoided, the risks cannot be shrugged off. Due to the combined impact of the eurozone crisis and the UK’s fiscal austerity plan, we expect growth to be minimal until mid-2012, and then improve gradually. Though UK growth will stay positive, and strengthen in the medium term, our forecast indicates that GDP will only return to its pre-recession level in 2014, while consumer spending will only rise back to its pre-recession position in 2015.
“The Chancellor’s deficit reduction strategy has earned the UK credibility in the financial markets. It also gives him the flexibility to do more to support growth when he announces his plans tomorrow.
“With UK growth likely to be minimal in the next two to three quarters, and with the eurozone likely to record negative growth in the near future, we expect the MPC to increase the Quantitative Easing (QE) programme further early in 2012, from £275 to £325 billion. However, higher QE on its own will not achieve its full potential without effective measures that would to improve to the flow of credit to businesses, notably viable SMEs.