UK risks recession and lengthy stagnation - BCC

LONDON Tue Jan 10, 2012 12:27am GMT

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LONDON (Reuters) - Britain's economy is at risk of contracting in the first half of this year after stagnating in the final quarter of 2011 due to the euro zone debt crisis, a survey from the British Chambers of Commerce showed on Tuesday.

The BCC - which polled nearly 8,000 members - stopped short of forecasting an outright recession, saying only that one quarter of negative growth was likely over the next six months, but warned this hinged on government action to help business.

"A new recession is not a foregone conclusion. However, action is needed urgently to tackle short-term stagnation and a lack of business confidence, damaged by the ongoing euro zone crisis," said BCC Director General John Longworth.

The gloomy forecast from the BCC, which represents firms employing about one in six British workers, chimes with view of the Bank of England and most other economists, and latest data from the retail sector and property market does little to dispel this view.

The British Retail Consortium attributed a stronger than forecast pick-up in high street sales in December to one-off factors, while the Royal Institute of Chartered Surveyors reported an ongoing fall in house prices, albeit at a slightly slower pace than before.

The BCC survey covers both manufacturers and service sector companies. Manufacturers reported their weakest domestic sales growth since Q3 2009, while orders fell at the fastest pace since Q2 2009.

Export sales and orders were still growing, but at the slowest pace since Q3 2009, and firms were planning to cut jobs and rein back investment in the light of the weakest prospects for sales and profit growth in two and a half years.

The situation was little better in the services sector. Though domestic sales picked up slightly at the tail end of 2011, orders fell at the fastest rate since Q3 2009 and firms expected profits to stagnate for the first time since then as well.

"The forward-looking home order balances ... highlight risks of declines in domestic activity early in the new year. We believe UK GDP will stagnate overall until mid-2012, with one quarter very likely in negative territory," said BCC chief economist David Kern.

The government's independent forecasting unit, the Office for Budget Responsibility, predicts growth of just 0.7 percent this year. However, the government's commitment to largely eliminate the large budget deficit by the time of the next national election in 2015 limits any fiscal boost it can give to business.

The Bank restarted its quantitative easing programme in October with an extra 75 billion pounds of gilt purchases, spread over four months. It is expected to add another 50 billion pounds at February's rate-setting meeting, taking the total to 325 billion, but the BCC warned that the policy may not have much effect.

"QE will not achieve its full potential in supporting growth unless supplemented by the early introduction of a sizable and effective credit-easing programme," Kern said, adding that the government also needed to cut red tape and reallocate spending.

(Additional reporting by Olesya Dmitracova; editing by Anna Willard)

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