|UK GROWTH UPGRADED, BUT RISKS REMAIN
May 31 2013.
- BCC upgrades its GDP growth forecast from 0.6% to 0.9% in 2013, from 1.7% to 1.9% in 2014, and from 2.2% to 2.4% in 2015
- The service sector is likely to outperform other sectors and record full-year growth of 1.8% in 2013, 2.3% in 2014, and 2.8% in 2015
- Unemployment expected to reach 2.650 million in Q3 2014 - 50,000 higher than we predicted in March
- Public sector borrowing is forecast at £117.5bn in 2013/14, £2.5bn lower than the OBR predicted in March 2013
- John Longworth: "The upward revision in our growth forecasts is encouraging. Unfortunately, this does not change the fact that economic growth is still too weak, and the pace of recovery will remain unduly slow for a while yet."
The British Chambers of Commerce (BCC) has today (Friday) upgraded its growth forecasts for the next three years from 0.6% to 0.9% in 2013, from 1.7% to 1.9% in 2014, and from 2.2% to 2.4% in 2015. In its Q2 economic forecast, the business group, which represents more than 100,000 businesses across the UK, warns that while the upgraded figures are encouraging, growth is still too weak and the economy is facing many challenges, both domestically and internationally. The BCC is urging the Chancellor to use next month's Spending Review to help create the right conditions to boost enterprise, so that businesses can invest, export, create jobs and drive the recovery.
- The BCC is raising its UK GDP growth forecasts to 0.9% in 2013, 1.9% in 2014, and 2.4% in 2015
- In March 2013, we predicted GDP growth of 0.6% in 2013, 1.7% in 2014, and 2.2% in 2015
- The upward revision is mainly due to higher than expected GDP growth in Q1 2013, and a stronger recovery in service sector output and consumer spending.
- Although UK growth is forecast to remain modest until 2015, there will be a gradual medium-term improvement. After rising by 0.3% in Q1 2013, UK GDP is likely to continue growing by 0.3% per quarter in the second and third quarters of 2013. Thereafter, we believe there will be a slow improvement, with GDP quarterly growth edging up to 0.4% in Q4 2013, and 0.5% per quarter during 2014.
Commenting, John Longworth, director general of the British Chambers of Commerce, said: "The upward revision in our growth forecasts is encouraging. We have constantly said that earlier fears of a triple-dip recession were misguided and risked damaging confidence unnecessarily. Upward revisions of official figures may even show there was no double dip recession. There is no doubt that the improved outlook is a tribute to the unswerving determination shown by our members in previous quarters, when there was excessive pessimism over the economy.
"Unfortunately, this does not change the fact that economic growth is still too weak, and the pace of recovery will remain unduly slow for a while yet. We are still a far cry from getting the economy fully back on track. The UK is, and will for some time, be performing below its potential and we can do so much better. But the government must step up its efforts to create the right conditions for an environment that supports enterprise, as this will help more businesses to create jobs, invest, export and ultimately, grow.
"The Spending Review is a prime opportunity for the Chancellor to reinforce his commitment to a business-driven recovery. The economy only stands a chance at improving if the government shifts priorities towards capital investment and measures that will give firms the tools they need to grow. There is plenty of scope to cut current spending in order to accommodate this, and long-term decisions will be necessary to secure a bright future for Britain. The Treasury and the Bank of England can do more to provide guarantees that would encourage private investment in infrastructure and other capital projects. It is also important to see more direct support to boost exports, rather than relying on the more indirect vagaries of exchange rates."
David Kern, BCC Chief Economist, said: "The new forecast signals a modest improvement in prospects, with slightly stronger growth and lower inflation than we previously thought, and with borrowing a little lower than the OBR predicted in March. But the UK economy is still under considerable pressure. Reducing the structural deficit is proving a longer and more painful task than initially expected. However, the outlook will gradually get better, partly because of back data revisions. GDP and consumer spending may regain their pre-recession levels in the second half of 2014, rather than in 2015 as previously thought.
"Not only will growth remain modest and below its long-term trend until 2015, but it will have to continue to rely heavily on services and consumer spending. Household consumption is likely to grow at a stronger rate than GDP in 2013 and 2014, as falling inflation eases the pressure on real incomes. In output terms, the service sector will remain the main driver of Britain's recovery.
"The two main risks facing our forecast are worsening eurozone prospects and an upturn in UK inflation, which would squeeze real incomes and could harm growth. Any attempts to boost exports by encouraging a weaker pound (such as extending QE) could prove counter-productive as the damage caused by imported inflation is likely to outweigh the small benefits to exporters. Efforts to rebalance the economy towards exports should be supported by measures such as greater funding for trade promotion and connecting businesses to overseas customers."
OTHER ELEMENTS FROM WITHIN THE BCC FORECAST:
Main components of demand
- Household consumption: We are expecting household consumption to grow by 1.3% in 2013, 2.0% in 2014 and 2.4% in 2015 - a slightly stronger recovery than predicted in our March forecast, as falling CPI inflation from Q3 2013 onwards will ease the squeeze on real incomes.
- Business investment recorded respectable positive full-year growth of 4.9% in 2012, but then registered a quarterly decline of 0.4% in Q1 2013. We expect business investment to grow by 1.8% in 2013, 5.3% in 2014, and 5.4% in 2015.
- Exports and the trade balance: Given the setback of net exports seen in 2012, and with eurozone GDP expected to record a further full-year decline in 2013, UK export volumes are forecast to fall by 0.5% this year.
- At 3.7% of GDP, the 2012 current account deficit is the highest since 1989. While we expect the deficit to narrow slowly in the next few years (to 3.3% in 2013, 3.0% in 2014 and 2.6% in 2015), it will remain high by historical standards.
Main sectors of the economy
- Manufacturing: In full-year terms, manufacturing output fell by 1.5% in 2012, after recording increases of 3.8% in 2010 and 2.2% in 2011. Output fell by 0.3% quarter-on-quarter in Q1 2013 to a level of 2.1% lower than in Q1 2013, and almost 10% below its pre-recession level in Q1 2008.
- In full-year terms, manufacturing output is forecast to decline by a further 1.1% in 2013 followed by modest, positive growth of 0.8% in 2014 and 1.3% in 2015.
- Our new forecast suggests that the service sector is likely to record full-year growth of 1.8% in 2013, 2.3% in 2014, and 2.8% in 2015 - stronger than other sectors and better than predicted in March.
- After falling by 2.4% in full-year terms in 2012, total industrial output, is forecast to decline by a further 1.4% in 2013, followed by modest positive growth of 0.3% in 2014 and 0.8% in 2015.
- Construction remains a weak and volatile sector in the UK economy (particularly outside London). We expect that construction output will fall by a further 3.0% in 2013, followed by positive but weak growth of 1.0% in 2014 and 1.1% in 2015.
- We expect unemployment to reach 2.650 million in Q3 2014 (8.1% of the workforce) - 50,000 higher than we predicted in March.
- The increases we are predicting in the UK jobless total are a result of the following:
1) A large number of inactive people will rejoin the workforce
2) Productivity falls seen since 2008 will be partially reversed, while demand will remain weak
3) Public sector cuts will cause further job losses in the public sector
- We expect employment to increase in the next 18 months, but any new jobs created will not be enough to absorb the increase in the number of economically active people.
- We believe that youth unemployment willincrease from 958,000 in Q1 2013 to 980,000 in Q3 2014.
Public finances and inflation
- UK public finances will remain under pressure. But taking into account the slight improvement in growth prospects signalled by our new forecast, we expect public sector net borrowing to be slightly lower than the OBR predicted at the time of the Budget. For 2013/14 we expect underlying borrowing to total£117.5 billion, £2.5 billion below the OBR's prediction.
- In annual average terms, we are now predicting annual CPI inflation at 2.6% in 2013, 2.2% in 2014 and 2.2% in 2015. In March we predicted 2.7% in 2013, 2.3% in 2014 and 2.2% in 2015.
- For annual average RPI inflation we are now predicting 3.1% in 2013, 2.8% in 2014, and 2.9% in 2015. In March we predicted 3.4% in 2013, 3.0% in 2014 and 3.1% in 2015.
Interest rates and Quantitative Easing (QE)
- We believe that UK official interest rates will remain at 0.5% until Q1 2015, and will then rise modestly to 0.75% in Q2 2015, and to 1.00% in Q4 2015. In our March forecast, we predicted the first increase to 0.75% a little earlier, in Q1 2015.
- We still expect that there will be a £50bn increase in Quantitative Easing, to £425bn in Q3 2013. However, our view is that increasing QE at the moment is unnecessary and could be counter-productive. In the March forecast, we predicted that QE would be increased in Q2 2013.