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UK economic growth forecasts continue to look gloomy

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The chancellor, George Osborne, must be feeling a little uncomfortable today. The British Chambers of Commerce (BCC) is the latest organisation to cut its forecast for UK growth for the third time this year. Its latest estimate suggests that the economy will grow by just 1.1 per cent this year, down from its 1.3 per cent estimate in June. That in turn was down from the 1.9 per cent it predicted at the start of the year. This follows other reports, such as that from the Confederation of British Industry (CBI), which cut its growth forecast for this year from 1.7 per cent to 1.3 per cent. The National Institute of Economic and Social Research also cut its forecast to 1.3 per cent from 1.4 per cent. Last month, the Bank of England cut its estimate for 2011 to 1.4 per cent from 1.75 per cent. At the time, the governor, Mervyn King, said that the outlook for the global economy had “deteriorated”, blaming this on the continuing debt problems of numerous national governments in the Eurozone. All this is in contrast to the government's Office for Budget Responsibility (OBR), whose forecast continues to insist on an expansion of 1.7 per cent this year. But that estimate dates back to the spring. The OBR’s chairman, Robert Chote, acknowledged in a newspaper interview last month that “there aren't many people" who now believe growth will meet that target. The BCC admits that the challenges faced by the UK are now "more difficult" than it had initially envisaged. Its director general, David Frost, points out that growth will be slow, inflation will remain high and unemployment will increase in the near term. As a result, the organisation believes that interest rates will need to stay at "very low levels" for much longer than previously thought. David Kern, the BCC’s chief economist, added that there were some "painful adjustments" ahead. “It won't be until 2013 that we will see GDP [gross domestic product] returning to pre-recession levels,” he said, “and it'll be 2014 before consumer spending recovers to its first quarter in 2008 level. Future growth will be constrained by the consequences of the credit bubble and the banking crisis. “Reducing high debt levels will be painful, and inevitably result in a prolonged period of relatively low economic growth. Although the policy options available are limited, authorities must focus on policies that will enhance the economy's growth potential and enable the UK to regain the productivity losses incurred during the recent recession.” But the BCC was not the only bringer of bad news. The latest Markit/CIPS purchasing managers' index (PMI) recorded a drop last month to a 26-month low. Based on a survey of purchasing executives at over 600 firms, it reports that new export business, which had driven the most recent recovery in manufacturing, fell at its fastest rate since May 2009. Its previous surveys had seen export demand at close to record levels up to the end of last year. Rob Dobson, senior economist at Markit, said that the second half of 2011 “has so far seen the UK manufacturing sector, once the pivotal cog in the economic recovery, switch into reverse gear. The sudden and substantial drop in new export orders is particularly worrisome, with UK manufacturers hit by rising global economic uncertainty, just as austerity measures are ramping up at home. It is hard to see where any near-term improvement in demand will spring from.” There was one positive note in the survey – a slowdown in input costs to their lowest rate of increase in 20 months. Some economists have suggested this may increase pressure on the Bank of England to consider further monetary expansion. David Noble, chief executive of the Chartered Institute of Purchasing & Supply (CIPS), argues that the weakness of the UK consumer market “…looks like it is here for the long haul, despite a slight burst of activity in August as consumer goods manufacturers looked to rebuild their inventories from a low base. “The silver lining at this point is the continued easing of inflationary pressure which is helping many businesses to protect their margins and maintain their prices, despite input costs staying relatively high.”

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