04/12/12

  • The BCC upgrades GDP growth forecast for 2012, the first upward revision since March 2011
  • Growth forecasts for 2013 and 2014 revised down
  • Reduced growth globally and the prospect of further austerity measures will slow the pace of recovery in 2013 and 2014
  • Unemployment forecast is 100,000 lower than in September, reflecting the stronger than expected performance of the UK labour market.
  • Our public sector borrowing forecast for 2012/13 is £104.1bn, around £12bn higher than the OBR forecast in March 2012
  • The BCC calls for effective measures in tomorrow’s Autumn Statement to support growth, job creation, exports, investment,and business confidence.

The British Chambers of Commerce today (Tuesday) has published its latest economic forecast, which sees UK growth in 2012 revised upwards from -0.4% to -0.1%. Although this is encouraging news for the UK economy, forecasts for the next two years have been downgraded from 1.2% to 1.0% in 2013, and from 2.2% to 1.8% in 2014. Businesses are resilient and have the ambition needed to drive our national recovery forward. But reduced global growth prospects, and the possibility of more reductions in current spending will slow the pace of UK recovery in 2013 and 2014. We hope to see the Chancellor using his Autumn Statement tomorrow to introduce the bold measures needed to support growth, job creation, exports, investment,and business confidence.

Economic Forecast

UK GDP

  • The BCC is raising its growth forecast for 2012 from -0.4% to -0.1%, but is downgrading its predictions for 2013 and 2014.
  • We are now forecasting marginally negative UK GDP growth of -0.1% in 2012, followed by positive but modest growth of 1.0% in 2013 and 1.8% in 2014.
  • In September 2012, we predicted growth of -0.4% in 2012, 1.2% in 2013 and 2.2% in 2014.
  • Our higher GDP growth forecast for 2012 is entirely due to the stronger-than-expected 1.0% quarterly growth recorded in Q3 2012, which reflected special factors such as the Jubilee and the Olympics.
  • Our lower GDP growth forecasts for 2013 and 2014 are due to two major factors:

1. The international environment has deteriorated, as growth forecasts for world trade, the eurozone and for other major economies have been cut in recent months.

2. Further austerity measures are likely, as disappointing public finance figures suggest that reducing the deficit will take longer than planned.

Main components of demand

  • Household consumption will remain subdued over the next two years but will grow more strongly than GDP. We believe household consumption will increase by 0.5% in 2012, 1.1% in 2013 and 1.9% in 2014, after falling by 1.1% in 2011.
  • Business investment fell in Q1 2012 but recovered in Q2 and Q3, and its growth so far this year was surprisingly strong given the weakness of the economy. In full-year terms, we expect business investment to grow by 4.2% in 2012, 4.3% in 2013 and 4.6% in 2014.
  • The rebalancing of the UK economy towards net exports has been disappointingly slow. After good progress in 2011, things worsened in 2012 when exports recorded declines in the first two quarters of this year. Though exports recovered in Q3 2012, we expect they will only grow by 0.2% in 2012 as a whole, while imports will increase by 2.1% this year.

Main sectors of the economy

  • Manufacturing is still a strong sector, but its relative share of total UK output has fallen in recent decades, and now accounts for only 10.5% of the whole economy. We expect manufacturing output to fall by 1.1% in 2012, followed by modest positive growth of 0.8% in 2013 and 1.0% in 2014.
  • Over the next few years, weak growth in world trade will limit the scope for increases in manufacturing exports. But now that manufacturing is productive and well managed, it has the potential to recover and prosper in the medium-term.
  • The volatile construction sector fell sharply in the first three quarters of 2012. In Q3 2012, construction output recorded a year-on-year decline of 10.9%. In full-year terms, we predict that construction output will fall by 8.9% in 2012, and by a more modest 1.4% in 2013, followed by positive but weak growth of 1.0% in 2014.
  • Service sector average growth is forecast at 1.2% in 2012, 1.4% in 2013, and 2.2% in 2014, a stronger performance than the other sectors. The service sector is by far the largest sector in the UK economy, and accounts for 77% of total output.

Unemployment

  • We predict that total UK unemployment will increase from 2.514 million (7.8% of the workforce) in Q3 2012, to a peak of 2.650 million (8.1% of the workforce) in Q4 2013 – a net increase of 136,000 in the jobless total. This means that we are expecting an unemployment peak that is 100,000 lower compared to our last forecast.
  • We also expect employment to increase, but any new jobs that are created will not be enough to absorb the increase in the number of economically active people.
  • This new forecast reflects the recent strong performance of the UK labour market seen in recent months. However, we still expect a moderate rise in the jobless total for the following reasons:

1. Some of the planned public spending cuts that are yet to be implemented will have an adverse impact on jobs.

2. Low UK GDP growth will dampen demand for labour.

3. Productivity falls seen since 2008 will start to partially reverse, and this will add to the jobless total at a time when demand remains weak.

  • Youth unemployment is forecast to increase from 963,000 in Q3 2012 to 990,000 in Q4 2013. We expect unemployment in the 16-17 age group to total around 185,000 (a jobless rate of 34.0%) in Q4 2013. Unemployment in the 18-24 age group is forecast to total around 805,000 (a jobless rate of 19.4%) in Q4 2013.

Public finances and inflation

  • Our public sector borrowing forecast for 2012/13 is £104.1 billion, around £12 billion higher than the OBR forecast published in March 2012.
  • In average full-year terms, we are now predicting annual CPI inflation at 2.9% in 2012, 2.5% in 2013, and 2.2% in 2014. Our new CPI inflation forecasts are higher than in September for 2012 and 2013, and are unchanged for 2014.
  • For RPI inflation, we are now predicting 3.3% in 2012, 2.6% in 2013, and 2.4% in 2014.

Interest rates and Quantitative Easing (QE)

  • Weak growth prospects, both globally and in the UK, means that official interest rates will be kept at very low levels for at least a further 12-15 months. We expect interest rates to remain at 0.5% until early 2014, and then to rise modestly to 0.75% in Q2 2014, and 1.00% in Q4 2014. This means that any future interest rate increases are likely to occur later than we predicted in September.
  • In September, we thought that QE would be increased further. Recently, there has been a welcome shift of opinion in the MPC against adding to QE. Although the committee remains divided about the value of adding to QE and this shouldn’t be excluded, we are now predicting no further increases in QE in the near term.

Commenting, John Longworth, Director General of the British Chambers of Commerce, said:

“As we wait in anticipation for the Chancellor to deliver his Autumn Statement tomorrow, our new forecast highlights the challenges still facing the UK economy over the months and years ahead. We have always been behind the Chancellor’s aim of reducing the deficit, but this has to be supported with the right conditions that allow businesses to thrive, or we will fail to see the growth the economy so desperately needs.

“The fact remains that growth is still too weak. Thankfully, we have businesses here in the UK that are ambitious, determined and resilient. Many firms are expanding exports, investing, and creating jobs, but more must be done to support the aspirations of growing companies that will be the wealth creators of tomorrow.

“This is why we are calling for decisive action in the Autumn Statement. Business wants a hybrid strategy that delivers both deficit-reduction and growth. This requires a laser-like focus on the implementation of important growth measures, such as the delivery of key infrastructure projects across the UK and the creation of a business bank that heralds a radical and long-term change in the way that companies access finance.

“Politicians need to show courage, imagination and leadership. If they put Britain’s economic priorities above politics, they can make a real difference in transforming our economy so that Britain can lead the way on the global stage.”

David Kern, BCC Chief Economist, added:

“Following the strong 1.0% upturn in the third quarter of the year, GDP growth is likely to slow sharply in Q4 2012 to only 0.1%, as the special factors that inflated Q3 growth unwind. We expect quarterly growth to increase gradually over the next two years, but we have to accept that it will remain modest and below-trend for some time. Although there will be a slow improvement over the medium-term, GDP will only return to its pre-recession levels at the end of 2014.

“With global growth remaining weak, the rebalancing of the UK economy towards net exports will still happen, but at a slower pace than we previously thought. UK GDP growth in 2013 and 2014 will have to rely more on household consumption. It is critical that further falls in inflation continue to ease the squeeze on disposable incomes and help to sustain domestic demand.

“We expect that public sector net borrowing will be higher than the OBR predicted at the time of the Budget, with excesses increasing from £12bn in 2012/13, to £20bn in 2013 and 2014.The government’s fiscal mandate of eliminating the structural budget deficit will take two to three years longer to complete than envisaged in the March 2012 Budget. Compared with the original targets set in June 2010, the task will take three to four years longer.”

 

Ends

 Notes to editors:

View the BCC’s Autumn Statement submission to the Chancellor here.

A full version of the forecast is attached.

Media contacts

Lisa Morrison

T: +44 [0]20 7654 5812
M: +44 [0]7717682221 
l.morrison@britishchambers.org.uk

Allan Williams

T: +44 [0]20 7654 5813
M: +44 [0]7825 746812
a.williams@britishchambers.org.uk