Danger to recovery from GDP 'slowdown'

THE risk of an economic setback remains high this year after GDP growth slowed significantly in the final quarter of 2010, one of the country's most powerful business groups warns today.

• David Kern, chief economist at the BCC

The British Chambers of Commerce (BCC) predicts economic output slowed to 0.4-0.5 per cent in the closing three months of last year, down from 0.7 per cent during the previous quarter.

Although manufacturers have continued to steam ahead, reporting their highest sales and orders for 16 years, serious concern is growing over the UK's biggest economic sector - services - which suffered a "disturbing" end to 2010 when the Arctic conditions exacerbated existing problems.

The BCC also warns that the shine could soon be taken off Britain's export boom if problems in the eurozone, Britain's biggest export market, persist.

David Kern, chief economist at the BCC, said: "The strength of manufacturing will help to rebalance the economy, but persistent problems in the eurozone will create difficulties for our exporters. The disappointing performance of the service sector is disturbing, particularly as we are yet to see the full impact of the VAT increase and deficit-cutting measures on these firms.

"Unless reversed, weaknesses in services could have adverse consequences, particularly for jobs. While we expect the private sector to withstand the impact of the tough deficit reduction programme, the UK recovery is fragile."

Kern said a second economic downturn is "unlikely" but he added that the dangers of a lurch back into recession "cannot be shrugged off".

"The MPC (monetary policy committee] and the government must act forcefully to support growth," Kern said.

The Office for National Statistics is yet to publish its first estimate of fourth-quarter GDP growth but the BCC survey, based on information from 5,600 British firms, does not augur well for the government, which suffered a blow before Christmas when third-quarter expansion was revised down from 0.8 per cent to 0.7 per cent.

The "worrying" weaknesses of the services sector are echoed today by the latest retail figures, which show the high street suffered its worst performance in eight months in December - normally the most lucrative month of the year for shops.

Snow was primarily blamed but the British Retail Consortium (BRC) also warned that financial worries caused shoppers to cut back on festive spending.

While food retailers continued to perform well, overall sales were down 0.3 per cent compared to December 2009.Many retail analysts warn the worst is yet to come with the 20 per cent VAT rate causing concerns about a new wave of profit warnings and collapses on the high street.

Stephen Robertson, director general of the BRC, said: "December was always likely to be unspectacular but the snow and ice dealt an extra blow to retailers."

According to the latest Purchasing Managers' Index (PMI) for services, the sector, which accounts for around two thirds of GDP output, shrunk for the first time in 20 months in December.