UK economy needs infrastructure stimulus, says BCC

The Treasury said it was already spending on key infrastructure

The British Chambers of Commerce has called for more government spending on infrastructure as it predicted that UK GDP would shrink by 0.4% in 2012.

The BCC also cut its forecast for 2013, from 1.9% to 1.2% growth.

The industry body said the eurozone crisis and a sharp rise in food and oil prices posed a continuing threat.

The BCC also backed other growth-enhancing measures, such as creating a business bank and Bank of England support for small business borrowing.

But it said that the Chancellor George Osborne should press ahead with cuts in benefits, the state pension and the civil service, which it said were needed to retain the confidence of financial markets.

The Director General of the British Chambers of Commerce, John Longworth, called on politicians to do more to help the economy grow. He told the BBC:"There are only a 150 MPs out of 650 that have ever been in business and only 30 have got any qualifications in science.

"We've now got a political class that's divorced from the reality of business and economics."

'Decisive break'

The BCC chief economist, David Kern, said in his latest quarterly forecasts for the UK economy: "As long as the chancellor demonstrates that he is committed to a firm fiscal plan, a moderate fiscal stimulus would be consistent with maintaining strong market credibility."

He said that up until now Mr Osborne's efforts had "relied too much on slashing investment" while spending in the rest of the government's budget had continued to grow.

He advocated a "large and well thought-out infrastructure programme" financed by government borrowing in order to boost growth.

According to TUC General Secretary Brendan Barber, the BCC's call marked "a decisive break from the Treasury line".

"There is now a growing consensus that the government's strategy is failing, and the real man-or-mouse test is whether the chancellor will relax austerity and invest for growth and jobs," he said.

A Treasury spokesman said that the government was "doing everything it can to get the economy moving".

The spokesman cited planned major UK infrastructure projects, as well as the Funding for Lending Scheme under which the Bank of England supports bank lending to mortgage borrowers and businesses.

Missed target

The BCC report forecast that public sector job losses would help push unemployment up to a peak of 8.5% a year from now.

It also predicted that the Office for Budget Responsibility would shortly confirm that it expected Mr Osborne would fail to hit his target of eliminating the government's structural budget deficit by 2016-17.

Thanks to the weak growth outlook, "the job will probably take two-three years longer to complete".

Only three months ago, the BCC had been expecting the economy to eke out 0.1% growth this year.

But it said it had had to slash its forecast in light of the weak growth data for the second quarter of the year since released by the Office for National Statistics (ONS).

The decision echoed a similar move by the CBI, who cut its 2012 forecast on Thursday to a 0.3% shrinkage.

Nonetheless, the BCC suggested that the ONS' economic growth data may be too gloomy and could be revised upwards, as it conflicted with more rosy jobs and industry survey data from the same period.

However, weak growth in the eurozone and rising oil and food prices - in particular a jump in corn prices due to the current drought in the US - had induced the BCC to cut its forecast for next year.

Despite the uptick in food and energy prices, inflation was expected to stabilise around 2.5%.

The BCC said it expected the Bank of England to maintain interest rates at their current historic low of 0.5% until early 2014, and to increase its purchases of UK government debt - "quantitative easing" or QE - by £50bn to £425bn.

However, the industry association said that instead of more QE, it would prefer to see the Bank take more unorthodox steps to boost the economy, such as purchasing the debts of small businesses.