Economic Activity Grinds to Halt as Rates Rises Hit Home; INTEREST RATES
Byline: By Steve Pain Deputy Business Editor
Relentless rises in interest rates are set to trigger a sharp slowdown in UK economic activity, according to the British Chambers of Commerce.
The BCC's economic adviser, David Kern, said: "In reaction to large increases in interest rates, the August 2007 BCC quarterly economic forecast is signalling a marked slowdown in the pace of UK economic activity. UK GDP growth is set to fall to a below trend pace towards the end of 2007, and growth is forecast to remain below trend during much of 2008.
"Year-on-year GDP growth is forecast to decelerate from an above-trend 3.1 per cent in quarter four 2006, to two per cent in quarters two and three 2008.
"But there is a risk that the UK slowdown would be sharper.
"The main driver of the expected UK slowdown is the cumulative effect of five increases in interest rates since August 2006, and the likelihood that rates would go up further."
He added: "Higher mortgage interest rates and average earnings growth below RPI inflation will intensify the squeeze on personal disposable incomes, and this will weaken household consumption.
"The recent strong growth in investment spending is set to decelerate, as the economy slows, while the strong pound will have an adverse effect on the external balance. The negative contribution of net exports to GDP growth is forecast to increase.
"Our central scenario assumes a further increase in interest rates to six per cent in the next few months, and this would heighten the pressures for much lower growth and higher unemployment.
"The situation would be considerably worse if rates increase above six per cent.
Specifically, our calculations show that, if the bank rate goes up to 6.25 per cent, GDP growth is set to weaken much more sharply than in our central scenario, to an average of 1.8 per cent in 2008, and to a year-on-year trough of 1.6 per cent in quarter two 2008.
"The August BCC forecast is predicting higher annual average GDP growth than envisaged in our May forecast, but this is due to stronger than expected growth in quarters one and two 2007.
"From this higher base growth is set to slow down sharply. …