New Economic Forecast Signals Marked Slowdown in Growth & Deterioration in Budgetary Position
10/02/08 | 09:23
David Kern, Economic Adviser to the BCC, said:
The new British Chambers of Commerce Quarterly Economic Forecast is signalling a difficult year for British business in 2008. Worsening global prospects, resulting from the credit and banking crisis, will have a major negative influence on the UK economy. However, recession is unlikely, and can be avoided, if the MPC and the Government take correct policy measures.
Year-on-year UK GDP growth is forecast to plummet, from a strong above-trend pace of 3.3% in Q3 2007 to a weak pace of 1.1% in Q4 2008. In full-year terms, average GDP growth is forecast to fall from 3.1% in 2007 to 1.7% in 2008, before edging up to 2.0% in 2009.
UK GDP growth, having recorded strong growth since early 2006, is forecast to remain below trend until mid-2009. Quarterly growth is expected to fall to a level only marginally above zero in the middle quarters of 2008. Outright falls in output are unlikely, and the position should improve gradually from late-2008. But UK growth is likely to remain weak in 2009.
Interest rate expectations have been revised down since November. Our central scenario envisages that UK interest rates would be cut to 4.75% before mid-2008. But cuts to 4.5%-4.25% are a realistic prospect if the economic slowdown worsens. The longer the MPC waits now, the bigger the danger that the situation would deteriorate, and the policy choices would become more difficult and more unpleasant later in the year.
UK public finances have worsened. The official budgetary forecasts for 2008/09 will very probably be breached. The new UK economic cycle is starting with large current deficits and with excessive levels of total borrowing. Given the expected sharp slowdown in UK economic growth, breaching the Government’s fiscal rules may be unavoidable in the next 2-3 years, even before one makes any allowance for the impact of the Northern Rock rescue.
Lower interest rates are necessary, but may not be enough on their own to counter the risks of a downturn. While breaching the fiscal rules would undermine credibility and confidence, it would nevertheless be justified to do so, if it helps to alleviate a very severe economic downturn. But, once the economy stabilises, the Government must take more determined measures to strengthen the UK’s medium term budgetary position.
Sharp squeeze on household disposable incomes, a weaker housing market, and pressure to improve personal finances, will dampen UK consumer spending in 2008. Weaker growth in household consumption, a worsening external deficit, and lower growth in investment will be the main contributors to lower UK GDP growth in 2008. A weak banking sector, which is unwilling or unable to lend, would exacerbate the adverse impact.
The UK corporate sector has so far been relatively resilient. But recent tax changes and weaker demand will have adverse effects on business, particularly if banks tighten credit. The climate facing UK businesses will become riskier and more difficult over the next year. The immediate policy priority is to limit the risk of a major economic downturn. Small businesses are particularly vulnerable when the banking sector is under pressure, and the Government may have to take special measures to support them if the credit crunch worsens.
Ends
MEDIA CONTACT:NOTES TO EDITORS:The British Chambers of Commerce (BCC) is the National Voice of Local Business.
The BCC sits at the heart of a powerful nationwide network of Accredited Chambers of Commerce serving business across the UK, which employ over five million people.