Plummeting growth forecast could derail Spending Review

Nia Williams

October 12, 2010

This is according to the latest Business Trends report by accountants and business advisors BDO LLP.

While the projections which underpin the Comprehensive Spending Review (CSR) expect growth of 0.5% in Q1 2011 and 0.6% in Q2 2011 with economic conditions improving further still thereafter, BDO’s Business Trends report stipulates we could head into zero growth territory in Q1 and negative growth in Q2 2011.

Should this happen, it is likely that growth will dramatically undershoot the government’s forecasts in 2011 with potential knock-on effects for future years.

BDO’s Optimism Index, which reflects how UK businesses expect trading to develop two quarters ahead, has continued to fall from 93.1 in August to 91.6 in September. The index is scaled so that a score below 95 represents recessionary conditions. Currently, the index’s level is the lowest since the deepest part of the recession in May 2009.

Peter Hemington, partner, BDO LLP commented: “We are worried that it is already beginning to look as if the government’s growth figures don’t stack up.

“The key risk for the CSR is that economic growth is much more fragile than we thought a few months ago. The government will be concerned about its credibility with the markets if it signals a desire to back away from its retrenchment programme.

“But the balance of risks has clearly changed since the election and the Chancellor would be wise to consider whether he can go slower than planned with cuts.

“MPC member Adam Posen has called for a new injection of quantitative easing and we believe that he is right. £50 billion has to be injected in the economy before the end of 2010 to stimulate the growth we so desperately need.”

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