BCC Raises 2010 UK Growth Forecast

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Sunday, the British Chambers of Commerce or BCC said the UK economy is likely to contract more than expected this year, but it is expected to outperform in 2010.

"The current recession - recording peak to trough declines of 5.5% - is much worse than the recession of the early 1990s. However, it is less severe than the early 1980s recession, when GDP recorded cumulative falls of 6%," the BCC said.

Revising its forecast, the BCC said gross domestic product or GDP is forecast to fall 4.3% this year, severe than a 3.8% decline predicted in June.

However, the economy is projected to expand 1.1% in 2010, faster than the 0.6% growth the business lobby had forecast previously. Economic growth is expected to climb to 1.9% in 2011.

BCC Chief Economist David Kern said, "The upturn in the economy has probably already started and we could see a relatively strong bounce-back in the next few quarters. But sustaining the recovery will be very challenging and the risks of a relapse are high."

The business lobby sees further rise in unemployment, but at a reduced pace. The number of people out of work is likely to peak just over 3 million from 2.43 million, or 9.6% of the workforce, in mid-2010. In June, the BCC had predicted that unemployment would hit 3.2 million.

"The UK economy faces serious challenges that could limit the pace of recovery in the next few years, including: overly indebted consumers, high unemployment, a fragile banking sector, persistent weakness in bank lending, weak growth in the Eurozone, and most importantly, the need to slash government borrowing and curtail debt," Kern added.

According to the BCC, public sector borrowing is forecast to total around 12.5% of GDP in 2009-10 and 2010-11. Public sector debt is set to rise to dangerous levels in the next few years, in excess of 80% of GDP, it warned.

"The painful but necessary reduction in government debt and borrowing, which will have to be implemented soon, should entail curbing public spending in all areas, except for vital business infrastructure expenditure," said BCC Director General David Frost.

"Given the perilous state of our public finances, we cannot afford to ring-fence other spending categories, no matter how desirable it may be. Reform of the public sector must be part of a credible plan to cut spending," Frost said.

The BCC expects the Bank of England to keep its bank rate unchanged at 0.5% until the second quarter of 2010. Thereafter, the BCC assumes very modest increases, with the interest rate reaching 1.50% in the final quarter of 2010.

The central bank is also likely to use the full GBP 175 billion allocated to the quantitative easing programme and may increase the size to at least GBP 200 billion to needed to ensure that the economy does not falter.

"While we expect a gradual improvement over the next two years, the pace of UK expansion is likely to be weak by pre-recession standards. It is critical that wealth-creating businesses have adequate capacity to respond to an upturn in demand when the recovery strengthens," Kern said.

"All the political parties must demonstrate that they recognize the vital role of wealth-creating businesses in driving a sustainable economic recovery," Frost urged.

Also on Sunday, manufacturers' organization EEF said manufacturing recovery would be anemic as cash-flow constraints, continuing uncertainty about the strength of markets and tighter credit conditions weigh on recovery prospects.

Sunday, the British Chambers of Commerce or BCC said the UK economy is likely to contract more than expected this year, but it is expected to outperform in 2010. (Market News Provided by RTTNews)