UK economy 'to pick up in near term'

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Media captionDavid Frost, director general of the BCC: "We have enormous challenges facing the economy"

The British Chambers of Commerce (BCC) has upgraded its forecast for the UK's short term economic prospects, but said interest rates must be kept low to aid recovery.

And it warned the pace of growth may slow sharply when the impact of "tough" government measures kick in.

The business group expects gross domestic product (GDP) to grow by 1.7% this year and by 2.2% in 2011.

This compares with earlier predictions of 1.3% and 2.1%.

Figures on Friday suggested UK GDP grew 1.2% in the second quarter of 2010.

This figure, from the Office for National Statistics, was greater than initially thought and was boosted by a strong performance by the construction sector.

It represented the fastest rate of quarterly expansion recorded since the first three months of 2001, but most economists do not expect this level of growth to continue.

Later this year the government spending review will outline some of the cutbacks it intends to make as it tries to reduce the budget deficit.

The BCC predicted that "the coalition's austerity programme and worsening global background are likely to dampen Britain's medium-term prospects", saying economic growth would slow to 1.8% in 2012.

Derailing risk

"If successful, the forceful deficit-cutting strategy announced in the emergency budget would put the UK on a path of sustainable and affordable recovery, and could help create a leaner and fitter economy," said BCC chief economist David Kern.

But speaking to the BBC, the former chancellor Alistair Darling warned that being too aggressive with spending cuts also risked derailing the recovery.

"The argument today is do you go so far so fast [in cutting spending] that you end up derailing the recovery, ending up with less growth and not cutting the deficit by as much as you want?" he said.

Mr Darling again defended his handling of the recession and his warning, in the summer of 2008, that the UK faced the worst recession for 60 years.

"What I said two years ago wasn't, I think, controversial and looking back I was probably too mild in my predictions."

In response, a Treasury source told the BBC that the biggest threat to economic recovery was not addressing the record budget deficit.

"Addressing this can only help keep rates lower for longer," they added.

Rate concern

The BCC's David Kern agreed that the scale of the government's cuts may heighten the risk of a double-dip recession, and called for the Bank of England to set out a growth strategy.

The Bank's rate setters have held interest rates at 0.5% since March 2009 and pumped £200bn into its quantitative easing (QE) programme, as it tries to stimulate growth in the economy.

Mr Kern urged the Bank's monetary policy committee (MPC) to keep rates steady until the middle of next year at the earliest - rather than raising them to try and lower inflation.

"Threats of a setback to growth remain more serious than risks of a surge in inflation," he said.

The BCC also forecast that unemployment would increase over the next 18 months, suggesting it would climb from the current level of 2.46 million to a peak of 2.65 million by mid-2012.

"There must be a relentless focus on ensuring that business is able to deliver growth and create employment," said David Frost, the BCC's director general.

"We need policies that rebalance the economy towards wealth-creating businesses, and enable the private sector to invest, export and create new jobs.

"Failure to get this right poses the biggest risk to recovery."