Britain’s economic recovery remains too reliant on debt-fuelled consumer spending, a leading UK business organisation has warned, as it downgraded its growth forecasts in the face of a manufacturing slowdown.
The British Chambers of Commerce (BCC) said on Wednesday that it expected economic growth for this year to be 2.4%, down from the 2.6% it was expecting three months ago; and for 2016 its forecast has been revised to 2.5%, down from 2.7%.
The downgrade came after official figures revealed that manufacturers cut back production by 0.4% in October, partly reversing a strong performance the previous month, and underlining warnings of a tough winter for the sector.
Official figures published on Tuesday showed that while George Osborne has pledged to unleash a “march of the makers”, manufacturing output in October stood 0.1% lower than the same month in 2014 – and remains 6.1% below its pre-recession peak.
Howard Archer, an economist at IHS Global Insight, said the renewed weakness of industry suggested Britain’s recovery would continue to rely on the dominant services sector.
“What is clear is that fourth-quarter GDP growth is once again going to be highly dependent on the services sector,” he said.
John Longworth, the BCC’s director general, commenting on its more pessimistic forecasts, said: “We cannot rely so heavily on consumer spending to fuel our economy, especially when driven by increased borrowing. We have been down this path before, and know that it leaves individuals and businesses exposed when interest rates do eventually rise.”
He added that recent weak trade data showed that the economic recovery has been unbalanced – too dependent on consumers, instead of exports and business investment. “The UK still needs to see a fundamental shift in its economic model if we are to remain relevant and prosperous in a changing world economy.,” he said.
The BCC, whose member firms employ more than 5 million staff, has also pushed back its expectation for the first rise in official interest rates by three months, to the third quarter of 2016.
Bank of England policymakers have held rates at their record low of 0.5% since March 2009. The BCC now expects borrowing costs to rise gradually over the next two years, to reach 1.75% by the end of 2017.
The Bank’s financial policy committee, which has the job of preventing a future crash, warned that it is looking closely at the rapid growth of credit in the economy and considering cracking down on rampant buy-to-let lending to prevent a bubble.
Separately, the ONS said overall industrial production, which includes mining and utilities, as well as manufacturing, increased just 0.1% in October on the previous month, to a level 1.7% higher than a year earlier; but economists pointed out that the rise was driven by a sharp swing in gas output.
“Industrial production only edged up in October due to erratic movements in its volatile components,” said Samuel Tombs, UK economist at Pantheon Macro. “The 0.4% month-to-month fall in core manufacturing output is another sign that the strong pound is starting to stifle the economic recovery, and the continued weakness of the manufacturing surveys suggest further falls lie ahead.”
The continued weakness of commodity prices has also hit industry, with many firms reliant on supplying or servicing the North Sea oil sector.
Zach Witton, deputy chief economist at EEF, said: “Looking forward, industry will remain under pressure from the low oil price and weak export demand flowing from slower growth in emerging markets.”
The ONS said manufacture of some types of machinery and equipment had been the biggest contributor to the decline in output, while other sectors, including pharmaceuticals, had performed more strongly.
The National Institute for Economic and Social Research thinktank also issued its latest GDP forecasts on Tuesday after the industrial output data was published. NIESR now expects GDP growth to be 0.6% in the three months ending in November, up from 0.5% in the three months ending October.
“This rate of growth is consistent with the continued absorption of spare capacity in the UK economy and our own view that the Bank of England is most likely to begin to increase rates in February 2016,” it said in a statement.
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