BCC lowers UK GDP forecast.
14/11/2005
Most of the risks to UK growth are to the downside - distinct danger of manufacturing recession
The British Chambers of Commerce (BCC) launches the tenth issue of its Quarterly Economic Forecast
Launching the results of the November 2005 BCC Quarterly Economic Forecast, David Kern, Economic Adviser to the BCC, said:
"The BCC is lowering its UK GDP growth forecast for 2005 to 1.6%, from 2.0% in our August forecast; this is further below the Budget forecast, and also below the recent revised official estimate. Growth in 2005 is now forecast to be only half the 3.2% growth recorded in 2004.
"Our UK GDP growth forecast for 2006 stays unchanged, at 2.2%, also well below the official Budget forecast. But our 2006 forecast assumes that UK quarterly growth will improve towards trend. If such an improvement fails to occur, UK average growth in 2006 could be below 2%. Most of the risks to UK growth are to the downside.
"The slowdown in UK GDP growth is mainly being driven by sharply lower growth in household consumption, as the cooling housing market and the higher personal debt burden dampen spending. Household consumption growth is forecast at 1.8% in 2005 (below 1.9% in our August forecast), and 1.9% in 2006 (down from 2.0% in our August), sharply lower than the 3.7% growth recorded in 2004.
"Manufacturing output growth is forecast at –0.4% in 2005 (unchanged from August) and 1.3% in 2006 (below the 1.5% increase expected in our August forecast). There is a distinct risk of manufacturing recession. Service sector output growth is forecast at 2.3% in 2005 (below the 2.5% increase expected in our August forecast), and 2.4% in 2006 (unchanged from August)."
David Kern added: "Growing evidence of sharply slowing UK growth has reawakened hopes of a cut in UK interest rates, although CPI inflation is set to stay for some time yet above the 2% target. On balance, we expect an additional UK repo (Base) rate cut, to 4.25% early in 2006. But the large UK budget deficit, and the risks to sterling from the large external deficit, will make it more difficult for the MPC to cut interest rates.
"The UK budgetary position remains stretched, in spite of HM Treasury's decision that the current economic cycle has started in 1997, not in 1999 as previously thought. The Golden Rule will just be met in the present economic cycle. But, given the scale of UK budget deficits, and the structural shortfalls in tax revenues, tax increases totalling some £10-15bn may still be needed in 2007 or 2008. Ahead of the Chancellor's forthcoming Pre-Budget report, concerns over future tax increases are causing serious damage to business confidence. We do not want to see further increases in business taxation."
