BCC raises GDP forecasts but is wary of impact of coalition cuts

The British Chambers of Commerce (BCC) has upgraded its growth forecasts for the UK economy for this year and next, but gave warning that the Government's austerity measures will take their toll on growth in the medium term.

The BCC had previously forecast the UK's GDP would rise by just 1.3 per cent in 2010 and by 2 per cent in 2011, but has now revised these up to 1.7 per cent and 2.2 per cent respectively. David Kern, the BCC's chief economist, said: "Activity will be supported in the short term by the cumulative impact of the huge injections of stimulus during the recession, the earlier sharp falls in sterling, and the rebuilding of stocks." The economy grew by a pacy 1.2 per cent in the second quarter, according to revised Office for National Statistics' data on Friday.

However, Charles Bean, the Deputy Governor of the Bank of England, gave warning at the weekend that further financial support from the state may be required to bolster the recovery. Speaking at a meeting of central bankers in Jackson Hole, Wyoming, Mr Bean said the action taken by policymakers had helped to avert financial meltdown. But he added: "The deleveraging process is incomplete, the recovery remains fragile ... while further policy action may yet be necessary to keep the recovery on track."

The BCC's Economic Forecast, which is published today, will caution that it expects the UK economy to grow by just under 2 per cent a year during the next four to five years, which is below the 3 per cent average between 1993 and 2007.

Mr Kern said: "We expect a sharp slowdown in the pace of growth to start in the first quarter of 2011, as VAT increases to 20 per cent and tough spending cuts are implemented. The need to significantly cut the deficit, strengthen the banking sector, and reduce personal debt will inevitably limit growth until the middle of the decade."

But alongside the necessary cuts, the BCC urged the Government to provide a successful growth strategy to support the economy's recovery. David Frost, the BCC's director general, said: "We need policies that rebalance the economy towards wealth-creating businesses, and enable the private sector to invest, export and create new jobs. Failure to get this right poses the biggest risk to recovery."

The BCC expects the Bank of England's Monetary Policy Committee to hold interest rates at 0.5 per cent until the second quarter of 2011, but expects them to hit 1.75 per cent by the end of next year. The business network forecasts the consumer-prices index will remain above the 2 per cent target until the end of 2011, but predicts it will fall below 3 per cent in the next year and slip back to 1.7 per cent in 2012.

Unemployment in the UK is expected to rise in the next 18 months from 2.46m to a peak of 2.65m.