British Chambers of Commerce Economic Forecast: growth is gathering momentum, but recovery is not secure

 

The British Chambers of Commerce (BCC) has upgraded its UK growth forecasts for the next three years from 0.9% to 1.3% in 2013, from 1.9% to 2.2% in 2014, and from 2.4% to 2.5% in 2015. In its Q3 economic forecast, the business group warns that while the upgraded figures are encouraging, the recovery is still not secure and many challenges remain. The BCC has urged the government and the MPC not to become complacent, and do everything in their power to ensure that our economic recovery moves from good to great.

ECONOMIC FORECAST

  • The BCC is raising its UK GDP growth forecasts to 1.3% in 2013, 2.2% in 2014, and 2.5% in 2015.
  • In May 2013, we predicted GDP growth of 0.9% in 2013, 1.9% in 2014, and 2.4% in 2015
  • The upward revision is mainly due to the stronger than expected Q2 2013 GDP growth (0.7%), a strong service sector as demonstrated by our recent Quarterly Economic Surveys, and household consumption.
  • A larger improvement in the trade balance than predicted in Q2 also counts towards the upward revision. Our own surveys have shown that export activity among our members is at record levels, reflecting the better figures we have seen in recent months.
  • UK GDP growth is forecast to average 0.5% per quarter in the second half of 2013 and the first half of 2014, before a slight upturn to 0.6% per quarter in the second half of 2014 and during 2015.

Commenting, John Longworth, Director General of the British Chambers of Commerce, said:

“The improved outlook is testament to the steadfast determination shown by businesses in previous quarters, who have consistently displayed confidence in the face of unwarranted pessimism over the economy.

“Unfortunately however the recovery is not yet secure. We have had false dawns in recent years and although this upturn appears to be on stronger ground, we must be aware that complacency could lead to setbacks. There are many external factors, such as the eurozone, the Middle East, and the Chinese economy that could halt our progress. However our surveys have shown that firms are confident about their prospects and want to expand, but they cannot do it alone.

“Improving access to finance for viable, fast-growing businesses is a major priority, and the government and the MPC must do more to ensure that vibrant SMEs can obtain finance on reasonable terms. The government must also work with the Bank of England and the Treasury to underwrite private sector investment in infrastructure projects, and our ‘have a go’ exporters need support on the ground to help them break into new markets.

“The government simply cannot divert attention away from growth, and must adopt measures to foster an enterprise-friendly environment in which businesses can continue to create jobs, invest and export. Only by doing this will we encourage the optimism and move our economy forward from good to great.”

David Kern, BCC Chief Economist, added:

“The new forecast signals an improvement in our economic prospects, but reducing the structural fiscal deficit continues to be a long and painful process. Tax receipts are inadequate as a result of sharp falls in oil and gas reserves, and cuts in current spending will be needed until 2019 at the earliest. Higher domestic inflation could also threaten the recovery, particularly if the MPC was to sanction further increases in QE which could lead to sharp falls in sterling. This would harm our economy far more than the minor benefits to exports that a weak sterling would provide.

“Though the rebalancing of our economy towards exports is not yet sufficient, we have made more progress than people realise. The real trade deficit in goods and services has more than halved in the last three years, and the surplus in services has and will continue to play a key role in narrowing our trade gap. While we would like to see more growth coming from investment and net trade, we should not be too concerned that consumer spending is helping to drive the recovery – it is better to rely initially on the consumer than to have no growth at all.

“The MPC’s new strategy of forward guidance should also help to create a more stable economic environment, by combining adherence to the inflation target with commitment to low interest rates. We believe that the 7.0% unemployment threshold is likely to be reached nine months earlier than the Committee predicts, and we expect interest rates to go up early in 2016. This means that companies will still have a reasonably long period in which to plan and invest, which is good for business confidence.”

OTHER ELEMENTS FROM WITHIN THE FORECAST

Main components of demand

  • Household consumption: We are expecting household consumption to grow by 1.7% in 2013, 2.3% in 2014 and 2.6% in 2015; this is slightly stronger than the expected growth in GDP, and slightly stronger than we predicted in our Q2 forecast, as falling inflation will ease the squeeze on real incomes.
  • Business investment recorded a small increase in Q2 2013 of 0.9%. But because of the falls recorded in Q4 2012 and Q1 2013, we expect business investment to record a full year fall of 2.8% in 2013. This will be followed by respectable positive growth of 4.2% in 2014 and 4.8% in 2015.
  • The trade balance: The much-needed rebalancing of the UK economy towards net exports suffered a setback in 2012, but improved significantly in the first half of 2013. We expect the UK overall trade deficit to continue narrowing gradually in the next few years, with most of improvement coming from trade in services.

Main sectors of the economy

  • Manufacturing: In full-year terms, manufacturing output declined by 1.7% in 2012. Longer-term trends show a weak performance; output in Q2 2012 is still 10% below its Q1 2008 pre-recession level.
  • Manufacturing output is forecast to decline by a further 0.8% in 2013, followed by modest positive growth of 1.1% in 2014 and 1.3% in 2015.
  • Our forecast suggests that the service sector will show growth of 1.9% in 2013, 2.6% in 2014, and 3.0% in 2015; this is much stronger than the growth of other sectors and better than we predicted in Q2.
  • Total industrial output is forecast to decline by 0.9% in 2013, followed by weak yet positive growth of 0.8% in 2014 and 1.0% in 2015.
  • Construction output was weak and volatile in recent years, with a full-year fall of 8.3% in 2012. In spite of the 1.4% quarterly upturn in Q2 2013 the sector’s output is still 16.1% below its Q1 2008 pre-recession level.In full-year terms, we predict that construction output will fall by a further 1.2% in 2013, followed by positive but relatively weak growth of 1.5% in 2014 and 1.1% in 2015.

Unemployment

  • We are forecasting that UK unemployment will fall from 2.514 million (7.8% of the workforce) in Q2 2013, to 2.450 million (7.5% of the workforce) in Q3 2014, and to 2.300 million (7.0% of the workforce) in Q4 2015, a net overall fall of 214,000.
  • This predicted fall is due to improved growth prospects and the belief that inactivity will fall at a slower pace than we envisaged in Q2. There is however a risk that planned spending cuts will cause further public sector job losses that the private sector may not be able to absorb.
  • We are forecasting that youth unemployment (people aged 16 to 24)willfall from 973,000 in Q2 2013 to 910,000 in Q4 2015.

Public finances and inflation

  • UK public finances will remain under pressure, but as the economy recovers in 2013 at a faster rate than the OBR predicted, we expect PSNB-ex (public sector borrowing excluding financial intervention, Royal Mail and QE transfers) to be £116.3bn in 2013-14, £3.5bn less than the OBR predicted.
  • In annual average terms, we are now predicting annual CPI inflationat 2.7% in 2013, 2.4% in 2014, and 2.3% in 2015. In Q2 we predicted 2.6% in 2013, 2.2% in 2014 and 2.2% in 2015.
  • For annual average RPI inflation we are now predicting 3.1% in 2013, 3.0% in 2014, and 3.1% in 2015. In Q2 we predicted 3.1% in 2013, 2.8% in 2014 and 2.9% in 2015.

Interest rates and Quantitative Easing (QE)

  • Our central forecast is that official UK official interest rates will remain at 0.5% until Q4 2015 and will then rise modestly to 0.75% in Q1 2016, and to 1.00% in Q2 2016.
  • We expect the Quantitative Easing programme to stay unchanged at £375 billion at least until Q4 2015. Our view remains that more QE is unnecessary and undesirable at present, as it would heighten risks of higher inflation and bubbles in the future.
 
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