The U.K. economy will almost stagnate this year and the government needs to support the recovery with fiscal-stimulus measures, the British Chambers of Commerce said.
Gross domestic product will probably rise 0.1 percent this year as the renewed turmoil from the euro-area debt crisis crimps demand, the London-based group said in an e-mailed statement today. It previously forecast growth of 0.6 percent. It sees GDP rising 1.9 percent in 2013.
Britain has slipped back into a recession and a report today may show factory output contracted in May for the first time this year, according to economists’ forecasts. While the BCC’s call for more government spending adds to similar comments from the International Monetary Fund last week, Chancellor of the Exchequer George Osborne has said that the fiscal consolidation is necessary to keep the U.K.’s top credit rating.
Osborne has “considerable credibility in the financial markets, and he is now in the position to increase spending on growth-enhancing policies without endangering Britain’s AAA rating,” BCC Chief Economist David Kern said in the statement. “This is necessary, because persistent stagnation threatens to damage the economy’s long-term productive potential.”
With the economy facing headwinds from the government’s budget squeeze, the euro-area turmoil and weak consumer confidence, the IMF said on May 22 that the U.K. needs more monetary easing and fiscal stimulus to stoke growth.
An index of U.K. manufacturing output by Markit Economics and the Chartered Institute of Purchasing and Supply probably dropped to 49.7 last month from 50.5 in April, according to the median estimate of 30 economists in a Bloomberg News survey. A reading below 50 indicates contraction. The report is due to be released at 9:30 a.m. in London.
As well as encouraging the government to set up a so-called business bank that would increase lending to companies, the BCC said Prime Minister David Cameron should increase infrastructure investment and ease the burden of regulation on businesses.
While the lobby group expects the Bank of England to keep its bond-purchase plan at 325 billion pounds ($502 billion) unless the European debt crisis worsens, it said buying private assets instead of gilts would make the current program more effective. It sees the key interest rate rising to 0.75 percent from the current 0.5 percent by the end of 2013.
The economy, which shrank 0.3 percent in the first quarter, may contract again in the current three-month period before strengthening after that, the BCC said. “Although there will be minimal growth this year, economic prospects will gradually improve,” it said.