Britain's economic slowdown will be longer than first feared and there needs to be strong action from the Government and the Bank of England to avert a severe downturn, the British Chambers of Commerce (BCC) says today.

In a bleak assessment of dangers to Britain's prospects, the BCC sounds a warning that the Bank may have to run some risks with inflation and the Treasury may have to accept a temporary breach of its fiscal rules in order to take the measures needed to underpin growth.

The BCC said that the longer the Bank waited before cutting rates again, the greater the economic damage would be.

David Kern, economic adviser to the BCC, said: “Waiting unduly before easing further would pose unacceptable threats to growth.

"The longer the MPC [the Bank's Monetary Policy Committee] waits now, the bigger the danger that the situation would deteriorate and the policy choices would become more difficult and more unpleasant later in the year.”

The BCC is forecasting that GDP growth will fall from 3 per cent last year to 1.7 per cent this year and 1 per cent at the start of next year. Its original GDP forecast for next year had been 2 per cent.

The CBI also says that exports for small and medium-sized companies have fallen unexpectedly, despite the weaker pound. A balance of 11 per cent of manufacturers reported a fall in export orders.

The fall comes as manufacturers are increasing their prices to reflect soaring costs. During the three months to April, a balance of 43 per cent said that their costs had increased - the strongest level for more than 20 years.

Output from small and medium-sized companies flattened from a balance of 10 per cent reporting growth in January to 2 per cent for the quarter ending last month.

However, the CBI survey also said that some small companies were hiring new staff actively.

Russel Griggs, the chairman of the CBI's SME council, said: “The uncertain wider economic climate has resulted in some mixed findings.

"What is certain is that small and medium-sized manufacturers are continuing to feel the impact of higher fuel and raw material costs and that they are now having to pass these on to customers.

“While the drop in export orders is worrying, particularly for medium-sized firms, there are some more encouraging signs: smaller firms have been quite bullish about taking on extra staff and some growth in output is forecast for the months to July.”

Another economic barometer from Royal Bank of Scotland's regional purchasing managers' index found that the slowdown had become increasingly broad-based.

Stuart Porteous, the head of group economics for RBS, said: “Nine of the 12 UK regions saw a slowdown in business activity in April, with five regions recording an outright contraction.

"The slowdown has become broad-based, with northern and southern regions following the Midlands.”

He said that the pace of the slowdown was “a real concern”, although not unexpected.

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