UK warned of imminent recession

The Sunday Times
August 17, 2008
UK warned of imminent recession by British Chambers of Commerce
David Smith
THE British Chambers of Commerce (BCC) will this week become the first leading business group to predict a recession in Britain.
Its quarterly economic forecast, to be published tomorrow, is expected to say that Britain is heading into a “technical” recession of two or more quarters of declining gross domestic product over the next six to nine months.
It will say that a deep recession, of the kind last experienced by Britain in the early 1990s, remains unlikely, but that the risks to the economy have grown significantly over the past quarter and unemployment is set to climb by up to 300,000.
The BCC believes recession is now a more serious threat to the economy than inflation and the Bank of England should start cutting interest rates as soon as inflation peaks in two to three months. It thinks Bank rate will be reduced to 4.75% by the end of the year and that there will be scope for a further cut next year.
The monetary policy committee cannot ignore the fact that recession threats have worsened,” said David Kern, the BCC’s economic adviser. “Limiting the threat of a deep recession must be the priority.”
The centrepiece of the forecast is very weak consumer spending, partly as a result of falling house prices. But the BCC, which represents Britain’s small and medium-sized businesses, also expects investment spending to be hit.
It will warn the government that, while the public finances are in a bad way, the Treasury should not make things worse for firms by raising business taxes. However, it will predict a significant widening of the budget deficit and a breach of the so-called sustainable investment rule, which aims to keep government debt below 40% of GDP.
The BCC’s forecast follows a gloomy assessment from the Bank of England, which said last week that the economy would be “broadly flat” over the next 12 months. Figures released showed inflation at a 16-year high of 4.4% and the biggest monthly rise in unemployment since late 1992. Both the eurozone and Japan reported declining GDP in the second quarter, hitting hopes that strong export demand would help offset the squeeze on the domestic economy.
In the past few days there have been significant shifts in global markets, with gold dropping below $800 an ounce, oil continuing to fall and the dollar gaining ground against all currencies, pushing the pound down to a two-year low of $1.86.
Whether sterling continues to fall against the dollar depends partly on the Bank’s interest-rate moves. Minutes of its August monetary policy committee meeting will be released this week and are expected to show a 7-2 vote in favour of leaving Bank rate unchanged at 5%, with David Blanchflower voting for a cut but Tim Besley favouring a rise.