'Huge risks' to recovery, Britain's business chiefs warn

Chambers of commerce and engineering employers call for more government help

The economy faces "huge risks" as it inches towards a recovery "where the risks of a relapse are high", two of the nation's leading business organisations warn.

The British Chambers of Commerce and the Engineering Employers Federation stress the "challenges" facing companies as they emerge from the worst slump in the three-quarters of a century. They agree with the Government that the economy will start growing by again next year – but are much gloomier about how strong and sustained it will be.

Releasing its latest Economic Forecast report, the British Chambers of Commerce (BCC) said that the country faces a GDP decline of 4.3 per cent this year, staging a modest return to GDP growth in 2010 and 2011 of 1.1 per cent and 1.9 per cent respectively.

The BCC sees unemployment hitting the 3 million mark by the middle of next year. They also urge the Bank of England to extend its programme of quantitative easing.

Currently the Bank's Monetary Policy Committee is committed to a £175bn boost, and will probably announce no change in policy at the end of its next meeting on Thursday.

David Kern, chief economist at the BCC, said: "Sustaining the recovery will be very challenging and the risks of a relapse are high.

"The UK economy faces serious challenges that could limit the pace of recovery in the next few years, including: overly indebted consumers, high unemployment, a fragile banking sector, persistent weakness in bank lending, weak growth in the eurozone, and most importantly, the need to slash government borrowing and curtail debt. These problems will inevitably dampen UK growth prospects for a considerable period."

Both output and new orders have made gains in the last three months, compared with the weakest conditions on record in the earlier part of the year, the latest quarterly survey from the Engineering Employers' Federation (EEF) says. Although the balance of companies reporting positive output and orders shows the majority of respondents are still struggling, the response is the most positive since the end of last year. And predictions for the coming three months come in at a relatively upbeat score of minus two.

Steve Radley, the EEF's chief economist, explained: "The overall message is that things seem to have stabilised ... But there is nothing to suggest we are on the verge of a strong recovery in manufacturing, and there isn't yet a feeling of confidence coming back."

The accountancy firm BDO Stoy Hayward, which helped to compile the report, said that industrial recovery is "not imminent".

One of the biggest worries is that investment intentions remain particularly negative. But there are indications of a revival in sentiment in the longer term. The accountancy firm PriceWaterhouseCoopers' Enterprising UK 2009 survey has found that three-quarters of "defiant" business people predict that their situation will improve or stay the same in the next 12 months, "and the level of optimism increases significantly with time".

The EEF is calling for an extension to the car scrappage subsidy scheme: "There is a good case for looking at phasing the scheme out gradually," Mr Radley said. "For the benefits it would bring for a key sector of the economy and its supply chain, the Government would be looking at a pretty modest expenditure."