UK economy shrunk more than feared and recovery slower, warns BCC

Published on Saturday 5 December 2009 13:12

THE UK's economy has shrunk more than originally feared and growth during recovery will be slower, the British Chambers of Commerce (BCC) warns today.

It is publishing its forecast for 2010 ahead of Wednesday's Pre-Budget Report and says Chancellor Alistair Darling must not handcuff the private sector's ability to boost the economy. The business group has made downward revisions to its GDP expectations for 2009 and 2010. It is now forecasting a large decline in UK GDP of 4.6 per cent this year, followed by growth of 1 per cent next year and 2.3 per cent in 2011. In its September forecast, the BCC predicted a 4.3 per cent GDP fall in 2009, followed by increases of 1.1 per cent in 2010 and 1.9 per cent in 2011.

However, it is more optimistic about the number of job losses the country will experience, reducing its prediction for peak unemployment to below 3 million. Its latest forecast is for unemployment to increase from 2.46 million to a peak of 2.7 million, or 8.6 per cent of the workforce, in mid-2010. In September, it predicted a jobless peak of 3 million.

It also warns that Britain's fiscal position is unsustainable in the medium term. Public borrowing is forecast to total 175 billion 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 per cent 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, according to the BCC. Given the risk of a double-dip recession, it is calling for additional monetary stimulus and measures to boost lending to sustain a recovery.

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."

He added that 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, he said.

BCC chief economist David Kern warned that 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," he said.