By Ilona Billington

LONDON--The U.K. economy continues to face tough headwinds that are likely to dampen growth both this year and next, the British Chambers of Commerce said Thursday, while urging the government to deliver on its promises of supporting businesses and stimulating growth.

In its quarterly economic forecast report, the industry body said a weaker than expected fourth quarter 2012 performance and the re-emergence of euro zone concerns has prompted it to lower its gross domestic product growth expectations to just 0.6% for this year and 1.7% for 2014.

Those forecasts are lower than the previous expectations for growth of 1.0% and 1.8%.

"Our new forecast highlights the challenges facing the U.K. economy," said John Longworth, director general of the BCC.

The BCC's outlook comes less than two weeks before the Chancellor of the Exchequer's Budget, and Mr. Longworth urged the government to act decisively to support those businesses that have solid plans for expansion.

"The government must make a serious effort to deliver on the many promises already made. This requires a focus on implementing measures that will boost growth, such as the movement of the business bank from rhetoric to reality, increasing the availability of access to finance, and delivering key infrastructure projects that will raise the confidence of businesses on the ground," Mr. Longworth said.

The report also shows that the BCC is less confident over the pace of the deficit reduction than the Chancellor, and is expecting public sector borrowing to total 89.7 billion pounds ($135.2 billion) in the financial year of 2012/13, GBP9.2 billion more than the Office for Budget Responsibilty's December forecast.

The body is also forecasting that the much talked about rebalancing of the economy away from consumer spending and importing goods and towards more manufacturing and exporting, will take even longer than it previously estimated.

After falling 0.3% in 2012, the BCC said its expects exports will grow 1.1% this year, by 3.3% in 2014 and 4.1% in 2015. At the same time, the current account deficit will also be reduced at a slower pace and reach 2.4% of gross domestic product by 2015 after hitting 3.3% in 2012.

Indeed, a separate report also published Thursday shows the outlook for the manufacturing sector is showing signs of improvement.

Manufacturing body, the EEF, said after a disappointing past three months, confidence within the sector has risen. More firms have plans to invest and take on new staff in the next three months as they expect new business to increase.

"As expected, manufacturers have seen a tough start to the year as weaker conditions at home and abroad dragged on from the end of last year," said the EEF's chief economist Lee Hopley.

"However, the outlook may be somewhat brighter looking forward and with more companies expecting to see growing production and sales in the next three months," Ms. Hopley said.

The EEF said it expects the manufacturing sector to grow 0.3% over the course of 2013, and forecasts total GDP to expand 0.9% over the same period compared with 2012.

The BCC, meanwhile, also said that the Bank of England will now likely need to provide further stimulus through its bond-buying or quantitative easing program by a further GBP50 billion some time in the second quarter of this year.

The business group previously said it expected no further action from the central bank.

"The debate about the U.K. monetary regime ahead of the arrival of Mark Carney as next Bank of England Governor has generated expectations that QE will be increased shortly, and that the Monetary Policy Committee is now more willing to tolerate higher inflation and a much weaker pound," said the BCC's chief economist David Kern.

"These perceptions are problematic. Adding to QE should only be considered if new threats emerge to the stability of the U.K. banking system," Mr. Kern said.

Write to Ilona Billington at ilona.billington@dowjones.com

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  03-06-131915ET
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