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Economy shrinkage could be less than thought

The British Chambers of Commerce has upgraded its GDP growth forecast for 2012, but still expects the economy to shrink.

The business body has revised growth from -0.4% to -0.1% for 2012, but has downgraded its estimates for 2013 and 2014.

As the Chancellor is set to deliver his Autumn Statement, the BCC say the rebalancing of the UK economy towards net exports has been disappointingly slow.

The report points out that exports fell into decline in the first two quarters of the year after good progress in 2011. Though exports recovered in the Q3 2012, the BCC expects they will only grow by 0.2% while imports will increase by 2.1%.

John Longworth, Director General of the British Chambers of Commerce, said: “As we wait in anticipation for the Chancellor to deliver his Autumn Statement tomorrow, our new forecast highlights the challenges still facing the UK economy over the months and years ahead. We have always been behind the Chancellor’s aim of reducing the deficit, but this has to be supported with the right conditions that allow businesses to thrive, or we will fail to see the growth the economy so desperately needs.

“The fact remains that growth is still too weak. Thankfully, we have businesses here in the UK that are ambitious, determined and resilient. Many firms are expanding exports, investing, and creating jobs, but more must be done to support the aspirations of growing companies that will be the wealth creators of tomorrow.

“This is why we are calling for decisive action in the Autumn Statement. Business wants a hybrid strategy that delivers both deficit-reduction and growth. This requires a laser-like focus on the implementation of important growth measures, such as the delivery of key infrastructure projects across the UK and the creation of a business bank that heralds a radical and long-term change in the way that companies access finance.

“Politicians need to show courage, imagination and leadership. If they put Britain’s economic priorities above politics, they can make a real difference in transforming our economy so that Britain can lead the way on the global stage.”

Elsewhere in the report, it is stated that unemployment is expected to increase to a peak of 2.650m in Q4 of 2013, a net increase of 136,000 in the jobless total.

Weak growth prospects internationally and in the UK have contributed to low interest rates, and the BCC expects rates to remain at 0.5% until early 2014, rising modestly to 0.75% in Q2 2014.

David Kern, BCC Chief Economist, added: “Following the strong 1.0% upturn in the third quarter of the year, GDP growth is likely to slow sharply in Q4 2012 to only 0.1%, as the special factors that inflated Q3 growth unwind. We expect quarterly growth to increase gradually over the next two years, but we have to accept that it will remain modest and below-trend for some time. Although there will be a slow improvement over the medium-term, GDP will only return to its pre-recession levels at the end of 2014.

“With global growth remaining weak, the rebalancing of the UK economy towards net exports will still happen, but at a slower pace than we previously thought. UK GDP growth in 2013 and 2014 will have to rely more on household consumption. It is critical that further falls in inflation continue to ease the squeeze on disposable incomes and help to sustain domestic demand.

“We expect that public sector net borrowing will be higher than the OBR predicted at the time of the Budget, with excesses increasing from £12bn in 2012/13, to £20bn in 2013 and 2014. The government’s fiscal mandate of eliminating the structural budget deficit will take two to three years longer to complete than envisaged in the March 2012 Budget. Compared with the original targets set in June 2010, the task will take three to four years longer.”

This was posted in Bdaily's Members' News section by Tom Keighley .