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Lower growth and more QE forecast for next year

The British Chamber of Commerce has reduced forecast expectations for UK GDP growth in 2011 to 1.9%, down from 2.2%, and is predicting £50bn more quantitative easing next year.

But it has upgraded its 2012 prediction from 1.8% to 2.1%.

It also predicted quantitative easing to be increased by £50bn to £250bn in the middle of next year.

The drop is because it predicts the negative impact of the government’s austerity plan will initially be more serious than previously envisaged.

This is mainly due to lower house prices and other signs of financial fragility in the UK household sector.

But David Kern, chief economist at the BCC, says the pace of growth should remain satisfactory with growth of 0.6% in Q4 2010.

He says: “The Bank of England cannot ignore the risk that if inflation remains around 3%, expectations could worsen, and its own credibility questioned. However, the MPC would be wrong to over-react. Inflationary expectations and wage pressures are under control at present.

“Threats of a setback to growth will remain more serious than risks of a surge in inflation during the next 12-18 months. We assume that the MPC will keep the Bank Rate at its current 0.5% level until at least Q3 2011.

“Given the risks of a setback to growth in the first 2-3 quarters of 2011, we expect the MPC to increase the QE programme from £200bn to £250bn before the middle of next year.”

The report shows unemployment will rise from 2.45 million, or 7.7%, in July-September 2010, to 2.6 million, or 8%, in the first half of 2012, a net increase of just over 150,000 in the jobless total. 

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