Economic slowdown expected, but recession unlikely says report

The British Chambers of Commerce have released their latest Quarterly Economic Forecast. The report predicts two difficult years for businesses with a more prolonged slowdown than previously forecast, but the BCC doesn't expect the UK to enter a recession.

The Quarterly Forecast signals an economic slowdown over the next 6-7 quarters. UK GDP growth is now expected to be 1.7% in 2008 and 1.6% in 2009 (from 3% in 2007). The main reason for the slowdown is expected to be a marked slowdown in consumer spending, in reaction to slowing house prices and the squeeze on household disposable incomes.

With interest rates, the BCC says that they expect to see interest rates fall to 4.25-4.5% before the end of 2008, with further cuts possible in the following year. Although interest rate cuts may fuel inflation rises, some risks will need to be taken to encourage economic growth.

Economic slowdown and UK Businesses

Although the UK business sector has held up well so far in 2008, the BCC says that recent tax changes have undermined confidence. Weaker domestic demand may also exacerbate the adverse effects on UK businesses, particularly if banks tighten credit.

Although the US credit crunch is easing, the UK banking sector remains under pressure. UK businesses remain concerned that the tax burden facing them is set to increase, through new “stealth taxes” and through allowing local authorities to increase business taxes.

UK businesses will face a difficult and risky climate over the next year. 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. Demands for large increases in the minimum wage, to compensate for the abolition of the 10% income tax band, could be particularly dangerous at a time of sharp slowdown in the pace of growth.

The BCC reports says that the immediate policy priority for the Brown Government is to limit the risk of a major economic downturn. It is vital to ensure that the smooth flow of credit to UK businesses is not damaged by acute problems in the mortgage market and in the financial sector. Small businesses are particularly vulnerable when the banking sector is under pressure, and the Government may have to take special measures to support them if the credit crunch worsens.