UK economic performance to "remain mediocre"

14-08-2006

The UK economy is expected to grow this year by more than previously expected, but deteriorating public finances and higher interest rates will cause a slowdown in growth in 2007, a leading business group has claimed.

The British Chambers of Commerce (BCC) said that it was raising its UK GDP growth forecast for 2006 from 2.3 per cent to 2.6 per cent, based on the 0.8 per cent rise reported in the second quarter and revisions of previous GDP figures released by the Office of National Statistics.

But in its latest quarterly economic forecast, the lobby group said that it was cutting its forecast for economic growth in 2007 from 2.5 per cent to 2.4 per cent.

The group added that its initial forecast for 2008 predicted "continued pedestrian growth" of 2.4 per cent.

The BCC said that despite higher than predicted economic growth in 2006, it anticipated "serious risks resulting from worsening public finances and higher interest rates".

BCC economic adviser David Kern said: "The government's aim of achieving a sustained improvement in productivity is unlikely to be realised in the next few years."

He said that slower UK economic growth in 2007 was anticipated as a result of declining global economic growth and levels of household consumption remaining lower than expected, due in part to a rise in interest rates.

The BCC also claims that the medium-term outlook for the UK public finances had deteriorated and that the upward revision of GDP figures since 2001 reinforced the view that the country's worsening budgetary position reflected structural, rather than cyclical factors.

Mr Kern stressed that the chancellor Gordon Brown was in danger of breaching his "golden rule" on spending and borrowing "without further fiscal tightening".

"There is a clear risk that tax increases totalling at least £10 billion would be needed in the next few years to meet the fiscal rules, and this will pose a growing threat to business confidence," he said.

Mr Kern added that given "underlying uncertainties" in both UK and global markets, the Bank of England was wrong to increase interest rates to 4.75 per cent last week.

The BCC's economic forecasts assume that the cost of borrowing will remain the same until the autumn of 2006 and then decline back to 4.5 per cent in response to slowing economic growth.

But Mr Kern warned that if the benchmark rate of interest increased to five per cent or higher, the "negative implications for the UK economy would be very serious".


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