Eurozone Crisis puts UK Recovery at Risk

The UK economy will grow at a faster rate than expected this year, but the Europe-wide debt crisis may inhibit recovery in 2011, the British Chambers of Commerce (BCC) has warned.

There is even still a risk of a double-dip recession if the coalition Government does not take strong measures to reduce UK debt and create helpful conditions for businesses, BCC spokesman Sam Turvey said this week.

The caution came as the BCC revised its March GDP growth forecast from 1% to 1.3% following better than expected performance in the UK’s manufacturing sector and an increase in exports.

At the same time, however, the BCC reduced its growth prediction for 2011 from 2.1% to two%. The chief threat to UK trade is the debt crisis in the eurozone, which is liable to hamper the UK’s exports.

Under the rules of economic and monetary convergence, eurozone countries must not allow their national debt to exceed 60% of GDP at the end of each fiscal year. But 11 of 16 eurozone nations, including its three largest economies, are currently trading beyond this debt threshold.

“There is a massive amount of sovereign debt in the eurozone and, as we export 50% of our products there, that could severely affect demand for products from UK manufacturers.”

“The Government can’t do much about the risk from the eurozone, but it has a duty to restore confidence in the UK and put a credible deficit reduction plan in place. This will enable us to bring down the unsustainable level of debt which is making investors nervous.”

The BCC is also urging the Bank of England’s Monetary Policy Committee to keep interest rates low to encourage firms to invest in growth, and to reverse fully the hike in National Insurance contributions planned for 2011.

“If businesses are given the best possible environment, including low taxes and better infrastructure to carry goods around the country, the economy is more likely to pick up. The Government will have to raise taxes somewhere, but we don’t want private firms to bear the brunt of these.”

Director of accounting and consultancy firm RSM Tenon, Martin Austin, said that firms should not rely on Government measures alone to protect them from risks presented by the wider economy.

“We are seeing the odd green shoot, but there is a question mark over whether the economy is recovering, and conditions will remain tough. Businesses need to take responsibility for themselves by looking at aspects they can control.

“Every firm should address certain fundamentals, such as ensuring they keep their accounts up to date, monitoring their cashflow and managing key relationships with suppliers. They can also position themselves to take advantage of support – for example, by getting to know their bank manager which will enable him or her to make a better-informed decision on whether to lend to the firm.”

The Government is due to announce its emergency Budget on 22 June 2010.

Eurozone Crisis puts UK Recovery at Risk

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