GDP growth will be slower than forecast, says BCC

The BCC now predicts unemployment will peak at 2.65 million in 2010

A leading business group has lowered its economic growth expectations for 2011, warning against complacency after the UK's exit from recession.

The British Chambers of Commerce (BCC) had forecast GDP growth in 2011 at 2.3% but now says it will be nearer 2.1%.

"The obstacles to a sustained medium-term recovery now appear greater," it said in its latest forecast.

However, the group reduced its prediction for unemployment to peak at 2.65 million in 2010, from 2.7 million.

'Unacceptable risk'

Revised GDP figures released at the end of February showed the UK economy grew by 0.3% in the last three months of 2009, having previously contracted for six quarters.

In order to secure economic recovery we need to maintain public sector investment. To take this away would be an unacceptable risk to the economy Chancellor Alistair Darling

"The recession may have technically ended, but there is no room for complacency," said BCC Director General David Frost.

The BCC forecasts that public sector borrowing will rise to £165bn in 2010-11 before easing to £147bn in 2011-12.

It expects lower initial public sector deficits than the Treasury predicted in the pre-Budget Report, namely £178bn for 2009-10 and £176bn for 2010-11.

However, from 2011 onwards the BCC says the Treasury's forecasts are too optimistic and net public sector debt will increase to "dangerous levels" in excess of 80% of GDP.

Speaking on the BBC's Politics Show, Chancellor Alistair Darling reiterated his promise of halving the deficit over the next four years and defended his approach to the economy.

"In order to secure economic recovery we need to maintain public sector investment. To take this away would be an unacceptable risk to the economy," he said.

Prospects 'uncertain'

"A credible deficit-reduction plan, which both business and the markets can accept as realistic, must avoid stifling the economy's growth potential, and absolutely must enable companies to invest and export," Mr Frost said.

The government must use the forthcoming Budget as a platform for laying the foundations for a business-led recovery David Frost BCC

He called on the government to abandon the 1% rise in National Insurance contributions planned for April 2011, which he labelled a "tax on jobs" due to cost firms £4.7bn a year.

Instead, he said ministers should raise Value Added Tax by one percentage point to 18.5%.

He added: "The government must use the forthcoming Budget as a platform for laying the foundations for a business-led recovery.

"If it fails to do so, the recovery will take longer to gain momentum and may even slip into reverse."

BCC chief economist David Kern said the UK's prospects remained "uncertain".

He said: "Threats of a double-dip recession are greater in the near future than the dangers of higher inflation.

"However, Britain's position is not worse than that of many other European economies."