RTTNews - Thursday, the British Chambers of Commerce reduced its GDP estimate for the U.K. economy and warned that recovery is neither imminent nor guaranteed. But the business lobby said, There are growing signs that the worst phase of the recession is behind us.

The economy is now expected to shrink 3.8% this year compared to its earlier estimate of 2.8% contraction. A very small growth of 0.6% is expected for 2010. This compares with an 0.8% increase predicted in March.

In its June Economic Forecast, the business lobby said the worst point in the recession was in the first quarter of 2009. The pace of decline is now estimated to moderate significantly with much smaller quarterly drops in the second and the third quarters. The economy is set to expand by the fourth quarter, although at a low level.

BCC Chief Economist, David Kern said Over the next 4 or 5 years, the trend growth of UK GDP is likely to be considerably weaker than in the period proceeding the current recession. The UK medium-term economic outlook is grim and we are facing a period of austerity.

The BCC assessed the current recession as much worse than that of the early 1990s, but it would possibly be less severe than the early 1980s recession.

British unemployment is expected to rise to 3.2 million, or around 10% of the labor force during the second half of 2010. This was unchanged from its March forecast. Higher flexibility of the labor market would avoid a worse outcome in the current recession, with smaller decreases in employment than in early 1990s recession.

It is critical to avoid measures threatening our labor market flexibility, the BCC stated. Director General of BCC, David Frost said companies should ensure flexibility in order to hold onto their skilled employees. The skill base cannot be eroded further.

Annual inflation is forecast to drop well below 1% in the second half of 2009, forcing the Bank of England Governor to write an open letter to the Chancellor. However, inflation is unlikely to see below zero level in the current recession, the BCC said. The business group assessed deflation to be only a short term problem in the U.K.

Until the second quarter of 2010, the Bank Rate is forecast to remain at 0.5%. Very modest increases are assumed thereafter with rates reaching 1.25% in the last quarter of 2010. They also expect the central bank's asset purchase scheme to increase further to at least GBP 150 billion.

Earlier this week, Confederation of British Industry or CBI said the British economy is showing stabilization, but it will not be until the beginning of 2010 that there will be a return to growth. Ahead of the expected flat reading in the fourth quarter of 2009, the CBI sees a 0.1% quarterly contraction in the third quarter. For 2010, the business group predicts a 0.1% growth in the first quarter and 0.3% in the second quarter.

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