British economy likely to be 'worse than expected' in 2009

British businesses need to prepare themselves for a worse than expected 2009 as a "very sharp deceleration in consumer spending" and a worsening external deficit put the squeeze on corporate Britain.

According to the British Chamber of Commerce's quarterly economic forecast, pros-pects for next year have worsened over the past few months, and while recession can still be avoided, the marked slowdown in growth will be enough to put many businesses under substantial pressure.

The BCC predicts that GDP growth will remain below trend until the end of 2009, coming in at 1.7 per cent in 2008 and just 1.6 per cent the following year. In February, the BCC had predicted a recovery to 2 per cent in 2009, but the business group now expects conditions to deteriorate.

David Kern, the economic adviser to the BCC, said: "British businesses are facing two difficult years. The Monetary Policy Committee and the Government must adopt pro-active policy measures aimed at countering the threats to growth."

With public finances very stretched, the BCC believes that there is now a clear risk that the Government will breach its fiscal rules over the next two or three years.

"While breaching the fiscal rules would undermine credibility and confidence, such a breach would nevertheless be justified if it helps to alleviate a very severe economic downturn," said Mr Kern.

"At the very least, the automatic stabilisers, which increase the size of the budget deficit when the economy slows, must be allowed to do their job and mitigate the downturn. But, once the economy recovers, the Government must take more determined measures to strengthen the UK's medium-term budgetary position."

Meanwhile, the CBI will reveal today that small- and medium-sized manufacturers have been raising their prices over the past few months, to try to tackle what has been the strongest pressure on costs in more than 20 years.

The CBI survey said that as well as rising costs, manufacturers have also had to deal with slowing demand. Russel Griggs, the chairman of the CBI's SME council, said: "Small and medium-sized manufacturers are continuing to feel the impact of higher fuel and raw material costs, and they are now having to pass these on to customers.

"While the drop in export orders is worrying, particularly for medium-sized firms, there are some more encouraging signs: smaller firms have been quite bullish about taking on extra staff, and some growth in output is forecast for the months to July."