Chancellor George Osborne should take advantage of low borrowing costs and unleash recession-busting policies, says BCC
George Osborne should take advantage of record low borrowing costs to unleash a £5bn package of emergency recession-busting policies, the British Chambers of Commerce (BCC) said on Friday, as it slashed its growth forecast for 2012.
The BCC, which represents more than 100,000 firms, now believes the economy will produce growth of only 0.1% this year, down from its previous forecast of 0.5% – even assuming that a major European recession and banking crisis is avoided.
David Kern, the BCC’s chief economist, said the chancellor should exploit some of the hard-won credibility he has gained with his austerity programme and boost the flatlining economy with £5bn-£6bn of public spending.
“The forceful measures adopted by the chancellor since June 2010 have earned him 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. This is necessary because persistent stagnation threatens to damage the economy’s long-term productive potential,” Kern said.
He called for infrastructure spending, as well as tax breaks for firms hiring new staff and capital allowances that make it cheaper for companies to buy new equipment. The BCC now expects growth of 1.9% next year, revised up from its previous estimate of 1.8%.
Rachel Reeves, the shadow chief secretary to the Treasury, said: “These forecasts would be very disappointing if confirmed by events. Their estimate is far lower than the OBR’s anaemic growth forecast of 0.8% for 2012 in March.
“With the BCC arguing for infrastructure investment and targeted tax cuts to get the economy moving again, what more evidence can David Cameron and George Osborne need that their policies have failed and that they now need a change of course and a plan B for growth and jobs?”
Official figures show that the economy has sunk back into recession, recording two successive quarters of negative growth. With next week’s extra bank holiday expected to depress activity, despite extra sales of diamond jubilee souvenirs, the BCC expects another contraction in the third quarter of the year, followed by a stronger autumn.
“Though growth will return, it will be over a longer period than expected,” said Kern. “GDP and consumer spending will only return to pre-recession levels in the second half of 2014 or early in 2015. Though growth might be low, the economy will expand in spite of the difficulties continuing to face the eurozone. However, if there is a disorderly euro breakdown, then growth is likely to be lower.”
The BCC’s demand for urgent action came as the yield on government bonds, or gilts, a measure of how much the Treasury has to pay to borrow, hit another record low, below 1.58% on 10-year bonds, as investors sought a safe haven from the turmoil in the eurozone.
America’s borrowing costs also sunk to new lows, despite fresh evidence that the recovery in the US economy may be petering out.
Official figures showed that GDP rose at an annual rate of 1.9% in the first quarter of 2012, down from the previously estimated growth rate of 2.2% and far slower than the 3% clocked up in the fourth quarter of last year.
The sluggish pace of growth was in line with analysts’ expectations, but came amid further evidence of the challenges still facing the US economy – and by extension president Barack Obama’s re-election campaign.
Weekly applications for unemployment benefits hit 380,000, a five-week high, the US labour department said.
The latest ADP National Employment Report – a closely-watched survey – showed the US private sector added 133,000 new jobs from April to May, lower than the 150,000 analysts expected.
Gus Faucher, senior macro-economist at PNC Financial Services, said the GDP figures were in line with expectations but the jobs figures, particularly from ADP, were more worrying. “On top of last month’s figures they suggest that growth may have slowed down,” he said.
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