BCC trims growth forecast as consumers spend less

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The Independent Online

The British Chambers of Commerce have slashed their economic growth forecast for this year to 2 per cent, fuelling expectations that the Chancellor will have to cut his own far more optimistic estimate.

The business lobby group said the recent sharp slowdown in household spending, coupled with the weak manufacturing sector, would drag growth lower this year. It trimmed its forecast from 2.4 per cent in May, as well as cutting next year's estimate to 2.2 per cent from 2.3 per cent.

The BCC said yesterday: "The slowdown in UK GDP growth is mainly being driven by sharply lower growth in household consumption, as the cooling housing market and the higher personal debt burden dampen spending."

Economists have long derided the Chancellor's forecasts for being too optimistic, arguing he will have to lower them in his Pre-Budget Report in the autumn. Gordon Brown estimated in his March Budget that the economy would manage healthy growth of 3 to 3.5 per cent this year and 2.5 to 3 per cent next year.

The consensus forecast among City economists is for only 2.1 per cent growth this year and 2.3 per cent in 2006.

That compares with the Bank of England's estimate of economic growth of around 2.1 per cent at the end of this year, accelerating to 3 per cent by the end of next year. It issued the forecasts earlier this month, a few days after cutting interest rates for the first time in two years. City analysts were surprised by the strong long-term growth outlook and think the Bank too is being too optimistic. They argue that economic performance will disappoint the Bank and force it to cut interest rates again, though possibly not before next year following a recent surge in inflation to above the Bank's target.

George Buckley, at Deutsche Bank, said: "For the time being, we stick with our view that the Bank will cut rates further this cycle, based on our view that economic growth will be somewhat weaker than the Bank believes."

The BCC predicted household spending growth of 1.9 per cent for this year, while the manufacturing output is expected to shrink by 0.4 per cent.