UK economic prospects for 2009 have ‘worsened' and the Bank of England and Government need to act proactively to counter threats to growth, the British Chambers of Commerce (BCC) warns.
In its May 2008 Quarterly Economic Forecast, British Chambers of Commerce economic adviser David Kern says while recession is unlikely and can be avoided, British businesses face a difficult 2008 and 2009.
The BCC predicts a “significant slowdown” over the next 6 to 7 quarters, with UK GDP growth forecasted to plunge from 3% last year, to 1.7% in 2008 and 1.6% in 2009.
Kern says the main driver of the UK GDP slowdown is expected to be a very sharp deceleration in consumer spending growth, due to falling house prices and the squeeze on household disposable incomes.
The BCC expects the UK bank rate to be cut to 4.25% or 4.5% before the end of 2008, but additional cuts to 4% or lower are “too risky” given the danger of sterling depreciation.
“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 says.
“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.
“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.”
The BCC also hit out at the Government’s recent tax changes to the UK business sector, saying it has “undermined confidence”.
"UK businesses will face a difficult and risky climate over the next year,” Kern says.
“The political pressures on the Government to compensate those losing from the abolition of the 10% income tax band, could pose new risks for business.
“Demands for large increases in the minimum wage, to compensate for the abolition of the 10% income tax band, could be particularly dangerous at a time of sharp slowdown in the pace of growth.”IFAonline
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