Output slump hits growth forecasts and adds to fear of job losses

Britain's surprise slump in output during the closing months of 2010 has forced business leaders to trim their growth forecasts for this year and warn of higher unemployment.

Releasing its latest economic forecast, the British Chambers of Commerce (BCC) also reiterated its opposition to an early hike in interest rates, arguing that such a move would slow growth and add to the jobless total.

Its view runs contrary to the CBI, which believes that Britain's export-led recovery can shrug off an immediate increase in borrowing costs.

The Bank of England's monetary policy committee meets this week to decide on the next move on interest rates, with most analysts expecting a further hold.

A rise by May is on the cards, however, amid a backdrop of stubbornly high inflation and soaring oil prices.

In its quarterly forecast, the BCC reduced its expectations for UK GDP growth in 2011 to just 1.4 per cent, from the 1.9 per cent cited in December. The business group now expects unemployment to top 2.65 million in early 2012, up from its previous forecast of 2.6 million. There are currently some 2.5 million people out of work across the UK.

The downward revision to GDP growth follows the unexpected 0.6 per cent slide in output in the final quarter of 2010 and the likelihood of an increase in interest rates during the second quarter of this year, earlier than envisaged by the BCC in December.

The BCC's chief economist, David Kern, said there was likely to be a rebound in GDP in the current quarter, while growth in 2012 would hit 2.3 per cent, up from the 2.1 per cent indicated in the December forecast.

"We expect a rebound in GDP growth to 0.6 per cent in Q1 2011, as the effects of the severe weather are reversed. But the next few quarters will be risky and growth will likely slow in Q2 and Q3, as the (government's] austerity plan is implemented more forcefully.

"While a new recession can be avoided, economic policy must focus on limiting the risks of a new major setback."

The BCC's renewed plea for a freeze on rates in the short term comes in spite of it pushing up its inflation expectations.It now forecasts average consumer price index (CPI) inflation of 4.2 per cent in 2011 and 2.3 per cent in 2012 - higher than estimates provided in December.

Pointing to a "shift of opinion" within the monetary policy committee, Kern said interest rates were likely to be raised gradually, touching 1.25 per cent at the end of 2011 and hitting 2.5 per cent in the final months of next year.

"While such increases in official interest rates will not push the economy into a new recession, they will slow growth and add to the jobless total," he added.

David Frost, director general of the BCC, said: "British businesses will welcome the government's desire to boost enterprise, and reduce red tape, but these words must be backed by action.

"The government is right to persevere with implementing its tough deficit-cutting plan and we expect the private sector to absorb these measures, given the right supportive policies in the Budget.

"This would allow growth to strengthen towards the end of this year and into 2012."

The BCC forecast has public sector net borrowing falling to 141.3 billion, or 9.6 per cent of GDP, in 2010-11, and 113.4bn - 7.3 per cent of GDP - in the coming financial year.