BCC predicts deep recession - but not as bad as early 80's

   

In its latest economic forecast, the British Chambers of Commerce paints a gloomy picture of the UK economy, with unemployment set to worsen significantly, and growth to continue its steep downward trend. However, the BCC doesn't think the current downturn will be as severe as the early 80's recession, and we should start to see a slow recovery in 2010.

The main points from the BCC's March forecast are as follows:

• The BCC is predicting a much larger cumulative decline in GDP in the current recession than in the early 1990s downturn: 3.7% in 2008-09 against 2.5% in 1992-93. But, the current recession is still likely to be less severe than the early 1980s recession.
• In annual average terms, this forecast predicts negative GDP growth of 2.8% in 2009, much worse than the 2.2% negative 2009 growth indicated in our January forecast. For 2010, we are predicting very shallow positive growth of just 0.8%.
• Sharp falls in manufacturing output (down 9% in 2009), and plunging capital investment (down 9.9% in 2009), are two particularly worrying features of the new forecast, and heighten the UK’s medium-term risks.
• UK manufacturing has the potential to recover but the sector must be nurtured in the face of a recession triggered by a financial and banking crisis. We need policies that would facilitate the much needed re-balancing of the UK economy towards industry.
• The BCC now predicts that in the second half of 2010, UK unemployment would rise to a peak of 3.2 million, or just over 10% of the workforce.
• This forecast predicts that total government borrowing would increase to £143 billion (10% of GDP) in 2009/10, and £158 billion (10.7% of GDP) in 2010/11. These figures signal a very serious budgetary position, which will have to be addressed vigorously as soon as the present recession ends.
• The BCC sees a distinct risk of deflation in the second half of 2009. In particular, the RPI measure is very likely to register deflation during significant periods of 2009.
• UK monetary policy will have to remain expansionary even after interest rates fall to almost zero. The focus from now on must be primarily on quantitative and credit easing (QE). The BCC says it supports vigorous moves in this direction, but it is important for the authorities to clarify both the scale of the planned operations, and their likely impact on the relationship between the Bank of England, MPC and the Treasury.

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