- The British Chamber of Commerce (BCC) upgrades GDP growth forecast for 2012, the first upward revision since March 2011
- Growth forecasts for 2013 and 2014 revised down
- Unemployment forecast is 100,000 lower than in September, reflecting the stronger than expected performance of the UK labour market
- The BCC calls for effective measures in tomorrow’s Autumn Statement to support growth, job creation, exports, investment,and business confidence
The British Chambers of Commerce today has published its latest economic forecast, which sees UK growth in 2012 revised upwards from -0.4% to -0.1%.
Although this is encouraging news for the UK economy, forecasts for the next two years have been downgraded from 1.2% to 1.0% in 2013, and from 2.2% to 1.8% in 2014. Businesses are resilient and have the ambition needed to drive the UK's national recovery forward. But reduced global growth prospects, and the possibility of more reductions in current spending will slow the pace of UK recovery in 2013 and 2014.
Economic Forecast
UK GDP
- The BCC is raising its growth forecast for 2012 from -0.4% to -0.1%, but is downgrading its predictions for 2013 and 2014.
- They are now forecasting marginally negative UK GDP growth of -0.1% in 2012, followed by positive but modest growth of 1.0% in 2013 and 1.8% in 2014.
- In September 2012, they predicted growth of -0.4% in 2012, 1.2% in 2013 and 2.2% in 2014.
- Their higher GDP growth forecast for 2012 is entirely due to the stronger-than-expected 1.0% quarterly growth recorded in Q3 2012, which reflected special factors such as the Jubilee and the Olympics.
The BCC's lower GDP growth forecasts for 2013 and 2014 are due to two major factors:
- The international environment has deteriorated, as growth forecasts for world trade, the eurozone and for other major economies have been cut in recent months.
- Further austerity measures are likely, as disappointing public finance figures suggest that reducing the deficit will take longer than planned.
Main components of demand
The BCC say that business investment fell in Q1 2012 but recovered in Q2 and Q3, and its growth so far this year was surprisingly strong given the weakness of the economy. In full-year terms, they expect business investment to grow by 4.2% in 2012, 4.3% in 2013 and 4.6% in 2014.
The BCC also say that the rebalancing of the UK economy towards net exports has been disappointingly slow. After good progress in 2011, things worsened in 2012 when exports recorded declines in the first two quarters of this year. Though exports recovered in Q3 2012, they expect they will only grow by 0.2% in 2012 as a whole, while imports will increase by 2.1% this year.
Main sectors of the economy
Manufacturing is still a strong sector, but its relative share of total UK output has fallen in recent decades, and now accounts for only 10.5% of the whole economy. The BCC expect manufacturing output to fall by 1.1% in 2012, followed by modest positive growth of 0.8% in 2013 and 1.0% in 2014.
The volatile construction sector fell sharply in the first three quarters of 2012. In Q3 2012, construction output recorded a year-on-year decline of 10.9%. In full-year terms, the BCC predict that construction output will fall by 8.9% in 2012, and by a more modest 1.4% in 2013, followed by positive but weak growth of 1.0% in 2014.
Service sector average growth is forecast at 1.2% in 2012, 1.4% in 2013, and 2.2% in 2014, a stronger performance than the other sectors. The service sector is by far the largest sector in the UK economy, and accounts for 77% of total output.
Unemployment
The BCC predict that total UK unemployment will increase from 2.514 million (7.8% of the workforce) in Q3 2012, to a peak of 2.650 million (8.1% of the workforce) in Q4 2013 – a net increase of 136,000 in the jobless total.
They also expect employment to increase, but any new jobs that are created will not be enough to absorb the increase in the number of economically active people.
This new forecast reflects the recent strong performance of the UK labour market seen in recent months. However, the BCC still expect a moderate rise in the jobless total for the following reasons:
- Some of the planned public spending cuts that are yet to be implemented will have an adverse impact on jobs.
- Low UK GDP growth will dampen demand for labour.
- Productivity falls seen since 2008 will start to partially reverse, and this will add to the jobless total at a time when demand remains weak.
Youth unemployment is forecast to increase from 963,000 in Q3 2012 to 990,000 in Q4 2013.
The BCC expect unemployment in the 16-17 age group to total around 185,000 (a jobless rate of 34.0%) in Q4 2013. Unemployment in the 18-24 age group is forecast to total around 805,000 (a jobless rate of 19.4%) in Q4 2013.
Interest rates and Quantitative Easing (QE)
Weak growth prospects, both globally and in the UK, means that official interest rates will be kept at very low levels for at least a further 12-15 months.
The BCC expect interest rates to remain at 0.5% until early 2014, and then to rise modestly to 0.75% in Q2 2014, and 1.00% in Q4 2014. This means that any future interest rate increases are likely to occur later than they predicted in September.
In September of 2012, the BCC thought that QE would be increased further. Recently, there has been a welcome shift of opinion in the Monetary Policy Committee against adding to QE. Although the committee remains divided about the value of adding to QE and this shouldn’t be excluded, they are now predicting no further increases in QE in the near term.
David Kern, BCC Chief Economist, said: “Following the strong 1.0% upturn in the third quarter of the year, GDP growth is likely to slow sharply in Q4 2012 to only 0.1%, as the special factors that inflated Q3 growth unwind. We expect quarterly growth to increase gradually over the next two years, but we have to accept that it will remain modest and below-trend for some time. Although there will be a slow improvement over the medium-term, GDP will only return to its pre-recession levels at the end of 2014. “With global growth remaining weak, the rebalancing of the UK economy towards net exports will still happen, but at a slower pace than we previously thought. UK GDP growth in 2013 and 2014 will have to rely more on household consumption. It is critical that further falls in inflation continue to ease the squeeze on disposable incomes and help to sustain domestic demand. “We expect that public sector net borrowing will be higher than the OBR predicted at the time of the Budget, with excesses increasing from £12bn in 2012/13, to £20bn in 2013 and 2014.The government’s fiscal mandate of eliminating the structural budget deficit will take two to three years longer to complete than envisaged in the March 2012 Budget. Compared with the original targets set in June 2010, the task will take three to four years longer.”