The new BCC quarterly economic forecast predicts prospects for 2009 to worsen and whilst recession is unlikely and can certainly be avoided, the marked slowdown in the pace of economic activity will be more prolonged than initially thought.
Mr Kern urges the MPC and Government to adopt pro-active policy measures aimed at countering the threats to growth.
The forecast is also signalling a significant slowdown in the pace of economic activity over the next six to seven quarters and UK GDP growth is likely to remain below trend until the final months of 2009. Quarterly UK GDP growth is expected to fall to a level only marginally above zero over the next six to nine months.
In addition to adverse global prospects resulting from the credit crisis, the main negative UK influences are falling house prices which will heighten the squeeze on UK personal disposable incomes and the worsening capital shortfalls facing the UK banking sector
The main driver of the UK GDP slowdown is expected to be a very sharp deceleration in consumer spending growth in reaction to falling house prices and the squeeze on household disposable incomes.
In annual average terms household consumption growth is forecast to plunge from 3.0 per cent in 2007 to 1.1 per cent in 2008, before edging up to 1.4 per cent in 2009. A worsening external deficit and lower growth in investment spending are likely to be additional contributory factors to lower UK GDP growth in 2008 and 2009.
Interest rate expectations have stabilised since the previous February forecast. The central scenario envisages that UK Bank Rate would be cut to 4.25 per cent to 4.50 per cent before end-2008. Additional cuts to 4.00 per cent or lower, though possible if the economic slowdown worsens are too risky given the danger that sterling would fall very sharply. A marked slowdown in UK activity is highly likely over the next 18 months even if rates are cut in line with our central forecast.
UK interest rate cuts would pose some dangers to inflation, but given the overriding threats to growth some risks to inflation will have to be accepted in the short term, particularly since significant fiscal expansion is not a realistic UK option.
the report warns that waiting unduly before easing further would pose unacceptable threats to growth. The longer the MPC waits now the bigger the danger that the situation would deteriorate and the policy choices would become more difficult and more unpleasant later in the year.
UK public finances remain stretched. There has been an improvement in recent months and the official fiscal forecasts for 2008/09 will probably be met. The new UK economic cycle is starting with large current deficits and with excessive levels of total borrowing.
Given the expected sharp slowdown in UK economic growth, the fiscal position is unlikely to improve significantly from 2009 onwards as the official forecasts envisage. There is a clear risk that the Government's fiscal rules would be breached in the next two to three years.
UK businesses will face a difficult and risky climate over the next year. The political pressures on the Government to compensate those losing from the abolition of the 10 per cent income tax band could pose new risks for business.
Demands for large increases in the minimum wage to compensate for the abolition of the 10 per cent income tax band could be particularly dangerous at a time of sharp slowdown in the pace of growth.
The immediate policy priority is to limit the risk of a major economic downturn. It is vital to ensure that the smooth flow of credit to UK businesses is not damaged by acute problems in the mortgage market and in the financial sector. Small businesses are particularly vulnerable when the banking sector is under pressure, and the Government may have to take special measures to support them if the credit crunch worsens.