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Medium-term growth positive, but VAT may hit immediate recovery

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The British Chambers of Commerce (BCC) has issued its latest economic forecast and has said that the UK economy should experience an upturn in growth in 2012.

The BCC revised down its growth forecasts for 2011 from 2.2 per cent to 1.9 per cent, largely as a result of the effects of the spending cuts, which, the business group said, would be more significant than previously estimated, and of the rise in VAT to 20 per cent.

However, the BCC has upgraded its estimates for the medium-term because of evidence that the economy is achieving a switch to private sector expansion.

As a result, growth forecasts for 2012 have been raised by the BCC from 1.8 per cent to 2.1 per cent.

David Frost, the BCC’s director general, said: “Reducing the deficit, with a clear focus on spending cuts, is vital in order to restore confidence, international credibility and stability. However, deficit reduction on its own will not deliver a sustainable recovery.

“There must be a relentless focus on ensuring that businesses are able to invest, export and create jobs. The Government must avoid at all costs new business taxes, and measures that damage initiative, enterprise, and innovation. This includes improving business’ access to finance, particularly for exports, and reviewing oppressive labour market regulations.’

David Kern, the BCC’s chief economist, added: “UK GDP growth was very strong in the second and third quarters of 2010, and the pace of expansion should remain satisfactory with growth of 0.6 per cent in Q4 2010. This will be sustained by the competitive sterling exchange rate, the continued effects of the earlier policy stimulus, and consumers attempting to beat the VAT increase.

“However, some of the factors driving growth in 2010 are temporary. The fiscal austerity programme entails risks, particularly in the next few quarters. We expect a sharp slowdown in the pace of UK growth starting in Q1 2011, in reaction to the VAT rise to 20 per cent and as tough deficit-cutting measures are implemented. Consequently, year-on-year GDP growth, after rising to 3 per cent in Q4 2010, is forecast to fall sharply to 1.4 per cent in Q3 and Q4 2011, and stay below 2 per cent in the early months of 2012.”

Mr Kern described the UK economy as “sufficiently robust” to avoid a new recession, and said that there are realistic hopes that policies aimed at rebalancing the economy towards the private sector will improve Britain’s medium-term prospects.

Consequently, the BCC has revised its GDP growth forecast for 2012. Though the next few years will be difficult, if the deficit-cutting plan is implemented successfully, trend growth of UK GDP could increase to 2.5-2.7 per cent per annum after 2015, the BCC predicted.

The BCC expects that the Bank of England will keep the base interest rate at its current 0.5 per cent level until at least the third quarter of 2011, and will also increase the quantitative easing programme from £200 billion to £250 billion before the middle of next year.

Mr Kern went on to say that the greater flexibility of the labour market has meant that falls in employment, and rises in unemployment, in the 2008-09 downturn have been much smaller than in the recession of the early 1990s.

But he concluded that, with employment falling much less than output in 2008-09, UK productivity has been hit with large declines and that, as the economy recovers, so it becomes critically important that such productivity losses are recouped.