BCC sees UK economy shrinking 3.8 pct this year

Britain's economy will contract by 3.8 percent this year and see only a muted recovery in 2010, the British Chambers of Commerce said on Thursday.

The business group said the worst of the recession was probably over and output would likely turn positive in the fourth quarter of this year.

But it said recovery was not guaranteed and there was a risk the economy could deteriorate again if stimulus from record low interest rates and expansionary fiscal policy were withdrawn too early. "A temporary rebound driven primarily by the stock cycle will not produce a sustainable recovery unless consumer spending, investment and exports start to improve," said BCC Chief Economist David Kern.

The BCC's forecast of a 3.8 percent contraction this year and 0.6 percent growth next year brings it more into line with consensus. Its previous forecasts in March — for 2.8 percent contraction this year and growth of 0.8 percent in 2010 — were well above consensus.

The BCC is the latest business group to warn that the green shoots of recovery may be fragile. The Confederation of British Industry took a similar line earlier this week.

Britain's economy shrank by 1.9 percent in the first three months of this year, its sharpest contraction since 1979, but forward-looking indicators suggest the economy is stabilising and may soon return to growth.

The BCC said it expected the cumulative decline in GDP in the current recession to come in at 4.9 percent. That would be much worse than the 2.5 percent decline recorded in the recession of 1992-1993 but less severe than the recession of the early 1980s.