UK business groups expect economy to shrink this year

Leading business groups in the UK have downgraded their economic forecasts and called for action from the government.

The British Chambers of Commerce (BCC) announced today that it expects the UK’s gross domestic product (GDP) to shrink by 0.4% in 2012, down from its earlier forecast for growth of 0.1%.

It claimed that the prospects for recovery are complicated by headwinds from the slowing global economy and the continuing crisis in the eurozone, as well as the austerity drive in the UK. In addition there are new risks from recent rises in food and oil prices, the BCC said.

Next year the organisation expects the UK economy to show growth of 1.2%, a decrease from its earlier prediction of a 1.9% rise in GDP.

The BCC has urged the government to adopt a hybrid strategy that delivers both deficit reduction and growth. It said that swift action is needed to support business investment, incentivise job creation and stimulate construction, particularly in the housing sector, and that this can be achieved by changing spending priorities or with limited extra borrowing.

“Politicians need to get some political backbone and show leadership,” said BCC director general John Longworth.

Yesterday another business organisation, the Confederation of British Industry (CBI), cut its GDP forecast for 2012, saying that it now expects the economy to shrink by 0.3% in 2012. This is a significant fall from the previous forecast in May of 0.6% growth, reflecting a more negative first half and a more modest rate of growth in the second half than was expected in May.

The CBI expects growth to return to the UK economy towards the end of the year and it forecasts GDP growth of 1.2% in 2013, revised down from its previous estimate of 2%. This matches the BCC forecast. The CBI noted, however, that the ongoing global uncertainty means there is a risk that growth could be lower.

Despite the coalition government’s austerity measures, both the CBI and the BCC have predicted that the government will end up borrowing more in 2012 and in the coming years. The BCC believes that public sector borrowing will overshoot the target by GBP14bn to GBP17bn in each year until 2015 and it said that the task of eliminating the government’s structural budget deficit will probably take two to three years longer than envisaged.