Launching the BCC’s May 2008 Quarterly Economic Forecast, David Kern, economic adviser to the BCC, said: “British businesses are facing two difficult years in 2008 and 2009. Prospects for 2009 have worsened. While recession is unlikely, and can certainly be avoided, the marked slowdown in the pace of economic activity will be more prolonged than initially thought. The MPC and the Government must adopt pro-active policy measures aimed at countering the threats to growth.”
The new BCC Quarterly Forecast is signalling a significant slowdown in the pace of economic activity over the next 6-7 quarters. UK GDP growth is likely to remain below trend until the final months of 2009. In full-year terms, average UK GDP growth is forecast to plunge from 3.0% in 2007 to 1.7% in 2008, and 1.6% in 2009. The February forecast predicted a moderate recovery in growth next year, from 1.7% in 2008 to 2.0% in 2008.
Quarterly UK GDP growth is expected to fall to a level only marginally above zero over the next 6-9 months. Year-on-year UK GDP growth is forecast to plummet, from a strong above-trend pace above 3.0% in Q2 & Q3 2007, to a very weak pace of about 1% in Q4 2008 & Q1 2009.
In addition to adverse global prospects, resulting from the credit crisis, the main negative UK influences are falling house prices, which will heighten the squeeze on UK personal disposable incomes, and the worsening capital shortfalls facing the UK banking sector
Kern said, “The main driver of the UK GDP slowdown is expected to be a very sharp deceleration in consumer spending growth, in reaction to falling house prices and the squeeze on household disposable incomes. In annual average terms, household consumption growth is forecast to plunge from 3.0% in 2007 to 1.1% in 2008, before edging up to 1.4% in 2009. A worsening external deficit, and lower growth in investment spending, are likely to be additional contributory factors to lower UK GDP growth in 2008 & 2009.
“Interest rate expectations have stabilised since our February forecast. Our central scenario envisages that UK Bank Rate would be cut to 4.25%-4.50% before end-2008. Additional cuts to 4.00% or lower, though possible if the economic slowdown worsens, are too risky given the danger that sterling would fall very sharply. A marked slowdown in UK activity is highly likely over the next 18 months, even if rates are cut in line with our central forecast.
“UK interest rate cuts would pose some dangers to inflation. But, given the overriding threats to growth, some risks to inflation will have to be accepted in the short term, particularly since significant fiscal expansion is not a realistic UK option. Waiting unduly before easing further would pose unacceptable threats to growth. 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.”
