Chancellor’s Budget must offer credible plan to curb future borrowing

British Chambers of Commerce – March 2009 Economic Forecast

The British Chambers of Commerce (BCC) is today publishing its March 2009 Economic Forecast. It comes in the wake of the MPC slashing interest rates to a new historic low and the Bank of England’s move into unchartered territory by creating £75 billion of new money to boost the economy.

The forecast also comes just weeks before the Chancellor’s Budget Report, in which he will outline the Government’s predictions for economic growth, employment and borrowing.

The main features of the BCC’s new forecast are:

• The BCC is predicting a much larger cumulative decline in GDP in the current recession than in the early 1990s downturn: 3.7% in 2008-09 against 2.5% in 1992-93. But, the current recession is still likely to be less severe than the early 1980s recession.
  
  
• In annual average terms, this forecast predicts negative GDP growth of 2.8% in 2009, much worse than the 2.2% negative 2009 growth indicated in our January forecast. For 2010, we are predicting very shallow positive growth of just 0.8%.      
  
  
• Sharp falls in manufacturing output (down 9% in 2009), and plunging capital investment (down 9.9% in 2009), are two particularly worrying features of the new forecast, and heighten the UK’s medium-term risks.
  
  
• UK manufacturing has the potential to recover but the sector must be nurtured in the face of a recession triggered by a financial and banking crisis. We need policies that would facilitate the much needed rebalancing of the UK economy towards industry.
  
  
• We now predict that in the second half of 2010, UK unemployment would rise to a peak of 3.2 million, or just over 10% of the workforce.
  
  
• This forecast predicts that total government borrowing would increase to £143 billion (10% of GDP) in 2009/10, and £158 billion (10.7% of GDP) in 2010/11. These figures signal a very serious budgetary position, which will have to be addressed vigorously as soon as the present recession ends.
  
  
• There is a distinct risk of deflation in the second half of 2009. In particular, the RPI measure is very likely to register deflation during significant periods of 2009.
  
  
• UK monetary policy will have to remain expansionary even after interest rates fall to almost zero. The focus from now on must be primarily on quantitative and credit easing (QE). We support vigorous moves in this direction, but it is important for the authorities to clarify both the scale of the planned operations, and their likely impact on the relationship between the Bank of England, MPC and the Treasury. 
  

Commenting, BCC Director General, David Frost, said:

“It will be business that leads the UK out of recession. For this reason it is vital that companies are given the freedom to create jobs and wealth.

“The Budget is the Chancellor’s last real chance to make up for the failure of the VAT cut last November. He now has a perfect opportunity to demonstrate the government’s firm commitment to supporting wealth creating businesses during this recession.

“Ministers must do everything they can to help nurture industry while creating the conditions required to make growth a reality. This means accepting that the regulatory burden on business needs to be cut, scrapping the planned increase for National Insurance Contributions, and freezing the national minimum wage.”

Chief Economist at the BCC, David Kern, added:

“UK prospects have worsened significantly since our last forecast in January. We are now predicting much larger UK GDP declines. Consequently, we now expect bigger unemployment increases and larger budget deficits.

“Unless the huge falls in UK capital investment are halted and reversed, the UK’s productive potential will be seriously weakened. Falling investment increases the danger that UK industry will find it difficult to increase output once the recession comes to an end and demand starts recovering.

“Government borrowing is unacceptably large. Rising budget deficits are essential in the near future, in order to alleviate and eventually end the recession, but the critical need to significantly reduce borrowing after the recession ends will inevitably dampen UK growth prospects for a considerable period.

“Producing a credible plan to reduce Government debt and borrowing over the medium-term is a key condition to maintaining the UK’s international credit rating and the confidence of the markets.”

Click here to download a copy of the Economic Forecast in PDF format>>

Ends

Media Contacts:

Fiona Cunningham
Tel: 020 7654 5812
Email: f.cunningham@britishchambers.org.uk

OR

Sam Turvey
Tel: 020 7654 5813
Email: s.turvey@britishchambers.org.uk

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.