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BCC forecasts recession is a distinct possibility

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The British Chambers of Commerce has published its quarterly economic forecast, which predicts a distinct possibility of recession for the UK economy.

The latest forecast makes for rather gloomy reading and foresees turbulent times for British businesses.

Key Points - General Economy

The latest BCC economic forecast specifically warns that;

• There is now a distinct possibility of technical recession, but a major recession is "unlikely".
• UK unemployment is likely to increase by some 250,000-300,000 over the next two to three years.
• The longer the MPC waits before cutting rates, the bigger the danger that the situation will deteriorate, and the policy choices will become more difficult and unpleasant.

• The BCC expects that UK Bank Rate would be cut to 4.75% in Q4 2008, followed by an additional cut to 4.50% in Q1 2009.

• The “golden rule”, which prescribes that the Government will only borrow for investment over the economic cycle, is very likely to be breached.

Key Points - Small Businesses

The BCC also highlighted some specific points relating to small companies, and businesses in general:

• Government temptation to raise business taxes because it is running out of money, must be forcefully resisted.
• The UK business sector has remained relatively resilient until recently. But weaker domestic demand, concerns that banks would tighten credit, and fears over future tax increases, have undermined confidence. There is a clear risk that the adverse effects would worsen.

• 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.

• The temptation for the Government to raise business taxes in the next PBR and in the next Budget, because the exchequer is running out of money, must be forcefully resisted.

• Recent events have undermined business confidence, and have damaged relations between business and Government.

• It is vital to ensure that the smooth flow of credit to UK businesses is not damaged by problems in the mortgage market and in the financial sector.

• UK businesses will face a difficult and risky climate over the next 2 years. The immediate policy priority is to limit the risk of a major recession.

• The BCC urges the Government to pay particular attention to the threats facing small businesses.

British Chambers of Commerce Director General David Frost commented, "Whilst a marked slowdown in activity is likely over the next 18 months, even if interest rates are cut when inflation peaks, the correct policy decisions are still needed to ward off the threats of a serious and prolonged recession.

"The longer the MPC waits before cutting rates, the bigger the danger that the economic situation would deteriorate."

Launching the August 2008 BCC Economic Forecast, David Kern, Economic Adviser to the BCC, said, "Our quarterly economic forecast highlights a significant worsening in UK economic prospects. There is now a distinct possibility of technical recession.

"Our view is that the threats to growth are more serious and more immediate than the risks of higher inflation. The UK economy urgently needs an interest rate cut to counter threats of recession.

"The Chancellor will probably confirm in his next Pre-Budget Report (PBR) that the Government’s fiscal rules will be altered, acknowledging that the original fiscal rules would be breached, at least temporarily. This would clearly undermine credibility and confidence in the short term."

Posted August 19, 2008