The British Chambers of Commerce (BCC) has added its voice to claims that the British economy is heading toward recession.
In its latest quarterly economic forecast, the BCC said the country was on course to enter a “technical” recession of two or more quarters of declining output over the next six or nine months. But a major recession similar to the downturn seen in early 1990s was unlikely, the organisation said.
However, the BCC forecast that unemployment will climb by up to 300,000 over the next two to three years to nearly two million. It could even top the two million mark if conditions deteriorate.
David Kern, the BCC’s economic adviser, said: “Our quarterly economic forecast highlights a significant worsening in UK economic prospects. There is now a distinct possibility of technical recession.
The main drivers of the UK slowdown will be a “very sharp” deceleration in consumer spending growth as households tighten their belts amid soaring bills and falling house prices, the BCC said. Another contributory factor will be much lower growth in UK investment spending.
Last week Bank of England governor Mervyn King also warned that the UK economy could suffer two quarters of negative growth as it went through a “difficult and painful adjustment”. Inflation hit 4.4 per cent – more than double the Government’s targeted two per cent – in July, and
Mr King warned it could spend the rest of this year around the five per cent mark before it falls away through 2009.
Mr Kern said the UK urgently needed an interest rate cut to stimulate the economy. The Bank of England’s Monetary Policy Committee held rates at five per cent in July, the third month in a row they were left unchanged.
“Our view is that the threats to growth are more serious and more immediate than the risks of higher inflation,” Mr Kern said. “The UK economy urgently needs an interest rate cut to counter threats of recession.”
BCC director-general, David Frost added: “Whilst a marked slowdown in activity is likely over the next 18 months, even if interest rates are cut when inflation peaks, the correct policy decisions are still needed to ward off the threats of a serious and prolonged recession.
“The longer the MPC waits before cutting rates, the bigger the danger that the economic situation would deteriorate.”
The BCC, which represents Britain’s small and medium-sized businesses, said it was predicting GDP growth to fall to 1.3 per cent this year and 1.1 per cent in 2009. The economy grew by three per cent during 2007. Its May survey forecast a less abrupt slowdown, with growth of 1.7 per cent in 2008, and to 1.6 per cent in 2009.
The BCC report added: “If global circumstances worsen, if the MPC decides not to cut interest rates, and/or if the Government decides to tighten the fiscal position, UK growth prospects in 2008 and 2009 would be worse than our central scenario envisages.”
Data last week showed the economies of Germany, France and Italy – as well as the 15-state eurozone as a whole – shrank during the three months between April and June.
Paul Dales, UK economist at Capital Economics, said with the euro-zone accounting for around half of UK exports, the bad news from the continent meant the UK’s prospects could be even worse than the Bank of England warnings.
The BCC report follows a survey of global fund managers by Merrill Lynch that more than half expect the global economy to enter recession in the next 12 months.