The UK's economy is still growing, but this recovery is fragile and a double-dip recession still can't be ruled out, a business lobby group has warned.
According to the British Chambers of Commerce (BCC), the debt crisis in the eurozone and troubles in the global financial markets are threatening the UK’s long-term economic stability.
Although the BCC has revised its GDP growth forecast for this year, to 1.3% from 1.0% in March, it has slightly lowered its growth expectations for 2011 from 2.1% to 2.0%, citing a greater number of obstacles facing a sustainable recovery as the reason for this.
BCC chief economist, David Kern, said: “Following the modest slowdown in Q1 2010, we expect relatively strong GDP growth in the next few quarters. But, the factors driving the early stages of the recovery are temporary. Longer-term growth prospects are weak.
“After two consecutive quarters of positive UK economic growth, the risk of an immediate relapse is less severe. However, the recovery is still weak, and it would be unwise to disregard the threat of a double-dip recession. The crisis in the eurozone and turmoil in the global financial markets threaten to dampen the UK’s growth prospects.”
Kern added that the government’s decision to adopt “forceful measures” to deal with the budget deficit will help to restore market confidence and underpin Britain’s AAA credit rating, although he warned that additional fiscal tightening, beyond the £6bn already announced, should only be implemented when the recovery is far more secure.
“The UK economy is now recovering. But, the improvement is fragile, businesses large and small are still facing considerable pressures, and there are significant risks posed by the current crisis in the eurozone,” added David Frost, director general of the BCC.
Frost said creating the right conditions for a lasting recovery will depend upon the government’s “unwavering determination” to support growing businesses.
“Rebalancing the economy towards the private sector must be at the very heart of June’s emergency budget – with businesses encouraged to invest, grow and create jobs.
“The coalition must avoid new business taxes and measures that might damage enterprise and entrepreneurship. They will have to think very carefully about what their exact plans are around capital gains tax and the scrapping of certain corporation tax allowances that incentivise investment.”
The organisation is calling on the Bank of England’s Monetary Policy Committee (MPC) to keep interest rates low for a “prolonged period”, to enable firms to invest. The BCC’s latest economic forecast predicts that the MPC will hold the interest rate at 0.5% until November 2010.
The forecast also predicts that VAT will be increased to 18.5% in April 2011 and then to 20% in the autumn.
© Crimson Business Ltd. 2010