BCC Economic Forecast - December 2009 

Ahead of the Chancellor’s Pre-Budget Report, the British Chambers of Commerce (BCC) has  published its latest Economic Forecast. The business group has made downward revisions to its GDP expectations for 2009 and 2010, but is more optimistic about the number of job losses the country will experience, reducing its prediction for peak unemployment to below 3 million.  

The main features of the BCC forecast include:   

Unemployment will continue to rise over the next 6 to 9 months but at a much slower pace. Our new forecast is for unemployment to increase from 2.46 million to a peak of 2.7 million, or 8.6% of the workforce, in mid-2010. In September we forecast a jobless peak of 3 million.    

We are now forecasting a large decline in UK GDP of 4.6% in 2009, followed by positive growth of 1% in 2010 and 2.3% in 2011. In our September forecast, we predicted a 4.3% GDP fall in 2009, followed by increases of 1.1% in 2010 and 1.9% in 2011.      

Britain’s fiscal position is unsustainable in the medium-term. Public borrowing is forecast to total £175bn in 2009-10 and £188bn in 2010-11, before easing to £169bn in 2011-12. Public debt is set to increase to dangerous levels, in excess of 90% of GDP. This debt can only be reduced through fiscal tightening, such as spending cuts and tax increases.       

Despite a £200bn Quantitative Easing programme, growth in money supply and bank lending has been disappointingly weak. Given the risk of a double-dip recession, additional monetary stimulus and measures to boost lending are needed to sustain a recovery. 

Commenting, David Frost, Director General of the BCC said: 

"We need a thriving business sector to drive the UK’s recovery, so it’s vital that the Chancellor’s PBR avoids new business taxes, higher National Insurance contributions, or any measures that might damage investment, growth and job creation. 

“Given the perilous state of the public finances, we cannot afford any sacred cows when it comes to making spending cuts - no matter how politically desirable it may be. “Reform of the public sector must be the cornerstone of a credible plan to reduce spending. Freezing public sector pay and reforming pensions must be part of that plan, and action in these areas should start now.” 

BCC Chief Economist, David Kern, added: “The UK economy is probably now growing again but a relapse in activity is a real danger. Preventing a double-dip recession must be the main priority. In the next two or three quarters, the recovery will be driven by the stock cycle and by the cumulative impact of huge injections of monetary and fiscal stimulus. However, these factors are temporary. A sustained recovery requires steady medium-term growth in investment, net exports and consumer spending. 

“Unfortunately, the UK economy must make difficult adjustments in the next few years, which will limit the pace of recovery. In particular, the need to significantly cut the budget deficit, strengthen the banking sector, and reduce excessive personal debt will inevitably limit growth. 

“While our forecast envisages a gradual improvement over the next few years, the pace of UK growth is likely to be relatively weak by pre-recession standards. Over the next 4 or 5 years, growth of GDP is likely to average just under 2% per annum, considerably less than the 2.7% average in the period between 2003 and 2007.    

“Due to greater labour market flexibility, falls in employment and increases in unemployment during the current downturn, are much smaller than in previous recessions. However, with employment falling much less than output, productivity will register a big drop off. Unless Britain’s labour market remains flexible during the recovery period, falling productivity will damage our medium-term growth prospects.

 “The risks facing Britain’s growth potential will be exacerbated further by huge declines in capital investment. Unless investment cuts are halted and reversed, industry will find it difficult to increase output once the recession ends and demand starts rising more rapidly. 

“Trying to cut the fiscal deficit significantly before the economy starts growing at a more normal pace would be a mistake that could unleash a new recession. Nevertheless, it is increasingly urgent to present a credible plan for curbing the deficit. This must spell out the proposed measures and include a clear timetable. Postponing the presentation of a credible plan for restoring stability could threaten the UK’s international credit rating, with dangerous consequences for our economy.”