The BCC has downgraded its UK GDP growth forecast for 2014 from 3.2% to 3.0%, despite growth reaching a seven year high in 2014.
The BCC has also revised down its growth forecasts for the following two years from 2.8% to 2.6% in 2015 and from 2.5% to 2.4% in 2016. This is largely due to slower than expected growth in household consumption, exports and services, leading to weaker than expected GDP growth in Q3 2014.
Despite this, household consumption and services output are expected to be the main contributors to GDP growth in the next few years. Additionally, strong business investment is predicted with growth of 7.5% in 2014, 7.5% in 2015 and 7.4% in 2016.
Quarterly GDP growth is expected to remain at 0.7% in Q4 2014, followed by a slowdown to 0.6% per quarter from Q1 2015 onwards, rising to 0.75% in Q3 2015, two quarters later than in the Q3 forecast.
David Kern, Chief Economist at the BCC, said:
“Our GDP forecasts are slightly lower than in Q3, but overall the prospects are still positive. Although we expect a slowdown in the pace of expansion, UK growth in the foreseeable future will be stronger than in the eurozone, including in Germany and France. British business investment has recovered in recent years and we expect steady increases in the share of investment in GDP. But there are still some areas of concern - UK trade deficit continues to grow and the current account deficit is dangerously large.
“In the short term, the main concern for the UK is a continuation of the slowdown in recent months. A deceleration in growth may be unavoidable, given the weaker trends in the global economy, particularly in the eurozone. However, it is important to counter the impact of these downward pressures by maintaining low interest rates and pro-business policies, in order to minimise the risk of the recovery stalling. In the longer term the key structural risks facing the UK are persistent low productivity and the twin fiscal and trade deficits. Unless these issues are addressed resolutely, they could undermine Britain’s future credibility.
“Despite stronger than expected economic growth, the UK’s ability to generate tax revenues has deteriorated - due to weak earnings, the decline in oil and gas output, as well as big profit reductions from financial institutions. The UK must now persevere with the difficult job of cutting the deficit, while focusing on policies that support higher productivity.”
John Longworth, Director General of the BCC added:
“Although this updated forecast slightly lowers our growth predictions, it also confirms that Britain will be one of the fastest-growing developed economies as we close out 2014. This is a great achievement, and businesses up and down the country should be congratulated for their hard work and resolve to drive the recovery in the face challenges and uncertainty both at home and abroad.
“However, there is no reason why a 3% growth rate should be the height of our ambitions. Downgrades to our growth forecast are a warning sign that we still face a number of hurdles before securing a balanced and sustainable recovery. A number of headwinds from the global economy are also having a real impact on British businesses. The eurozone is weak, with a real risk of deflation. Growth in emerging markets has slowed and political uncertainty in Ukraine, the Middle East and elsewhere is affecting business confidence. Uncertainty in the economy generally affects consumer confidence as does the consumer spending and debt cycle.
“Our dependence on consumer spending and mortgages means that the UK economy is particularly sensitive to interest rates. Any short-term rate rises could present a huge risk to our economy. This would also impact on vital business investment. With UK exports broadly flat, it is crucial to reassess the UK’s overall export growth strategy and the support available to existing and potential exporters.
“Nonetheless it is encouraging to see that British businesses aren’t backing down from their expansion and investment plans, despite some uncertainty in the economic backdrop. We must continue to support these businesses as they invest, grow, innovate and export. A sustainable, well-balanced economy can only be achieved if there is commitment from all political parties to long-term strategic planning, rather than the political short-termism that has plagued British growth prospects for too long.”
