Forecast signals serious risks resulting from worsening public finances and higher interest rates.

Launching the results of the August 2006 BCC Quarterly Economic Forecast, David Kern, Economic Adviser to the BCC, said: "The BCC is raising its UK GDP growth forecasts for 2006, from 2.3% to 2.6%. But we are cutting our 2007 GDP forecast from 2.5% to 2.4%. Our first estimate for 2008 points to continued pedestrian growth of 2.4% in 2005. In spite of the higher 2006 growth, our forecast signals serious risks resulting from worsening public finances and higher interest rates.

"The improvement to our 2006 growth forecast is largely due to the 0.8% preliminary GDP growth in Q2 2006, and the recent extensive revision of previous GDP figures by the ONS. But, in spite of these statistical revisions, UK economic performance is set to remain mediocre. The Government's aim of achieving a sustained improvement in productivity is unlikely to be realised in the next few years.

"Household consumption growth is set to remain below its long-term average and below the expected growth in GDP. Our forecast relies on investment and exports taking over from the consumer as the main UK growth drivers. However, this cannot be guaranteed, given the global uncertainties and the fragile state of business confidence. Unless investment & exports grow at a satisfactory pace, above the growth in GDP, the UK recovery could go into reverse. With imports expected to grow more strongly than exports, in both 2006 & 2007, GDP growth could disappoint, even if exports expand strongly. The slower UK growth we expect in 2007 is due to much lower global growth, and below-trend growth in UK household consumption, partly in reaction to higher interest rates.

David Kern added: "The medium-term outlook for the UK public finances has deteriorated. The upward revision of UK GDP figures over the period since 2001 reinforces the view that the worsening UK budgetary position reflects structural rather than cyclical factors. With the net debt ratio set to approach, and probably exceed, the critical level of 40%, higher taxes may be needed even if the Golden Rule is met. But changes in the timing of the economic cycle heighten the danger that the Golden Rule may be breached without further fiscal tightening. There is a clear risk that tax increases totalling at least £10bn would be needed in the next few years to meet the fiscal rules, and this will pose a growing threat to business confidence.

David Kern concludes: "The UK repo (Base) was raised to 4.75% on 3 August. Given the underlying uncertainties, both global & domestic, we believe that the correct policy would have been to keep rates on hold for the time being, and we are concerned that there are pressures for rates to go even higher. Our forecast now assumes that Base rate will stay at 4.75% until the autumn of 2007, and then decline back to 4,50% in reaction to slower economic growth. A different interest scenario would alter the forecast, but not in a symmetrical way. If interest rates are slightly lower than in our central scenario, UK GDP growth would be only modestly higher. But if Base rate increases to 5% or higher, the negative implications for the UK economy would be very serious."