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Road to recovery fraught with risks, says BCC

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The UK economy has begun the journey towards recovery but still faces many risks, the British Chambers of Commerce (BCC) has said.

According to the BCC’s latest Economic Forecast report, the UK’s GDP is set to decline by 4.3 per cent in 2009, worse than the 3.8 per cent predicted by the BCC in June.

However, this will be followed by a forecast growth of 1.1 per cent in 2010 and 1.9 per cent in 2011, the BCC said, a more optimistic rate of recovery than the 0.6 per cent previously predicted.

The current recession is reckoned to be deeper than that of the early 1990s, although not as severe as the downturn of the early 1980s.

Unemployment looks set to climb, the BCC said, but at a slower pace, peaking at just over 3 million, or 9.6 per cent of the workforce, in mid-2010.

The BCC believes that the Bank of England should continue with its policy of quantitative easing and use the full £175 billion allocated to the programme.

But David Kern, the BCC’s chief economist, warned that the recovery was still hedged by a number of risks.

Mr 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.”

He argued that, for a recovery to be sustained, consumer spending, investment, and net exports all need to strengthen.

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 cut government borrowing and curtail debt could pose a threat to the pace of recovery over the coming years and dampen growth prospects for a considerable period.

Mr Kern concluded: “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.”