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Britain will avoid a double-dip recession but growth will be lower than expected, a leading business group has predicted.

The  British Chambers of Commerce  (BCC) downgraded its forecast for economic growth this year to 0.6% – it had previously expected the figure to match the 0.8% seen in 2011.

In its quarterly economic report, the group warned that the economy still faced “serious challenges”, with debt levels that are “too high” and unemployment set to rise to almost three million at the beginning of next year.

Growth is likely to be lower than expected in the second quarter of 2012 due to the extra bank holiday in June for the Queen’s Diamond Jubilee, while the  Olympics  in July and August could show unusually high growth figures in the summer, it said.

Nonetheless, growth from exports and business investment will prevent the UK falling back into recession this year and prospects will improve further in 2013, the BCC added, with the economy expanding by 1.8%. However joblessness will rise by 8.6% over the year to 2.9 million at the start of 2013, with the youth unemployment rate to reach 23%.

The group urged  Chancellor George Osborne  to “pull out all the stops” to help businesses and “squeeze every last drop of growth” from the economy, suggesting help for smaller firms to trade internationally and deregulation of the labour market.

“Our economic forecast underlines the need for the Government to deliver a Budget that will bring confidence to businesses,” the BCC’s director general John Longworth said.

“Businesses up and down the country are doing their utmost to find new markets and grow their firms, despite the difficult economic challenges they face. Only the private sector will drive recovery and help deliver public services, like education, healthcare and pensions.

“A sustainable recovery depends on creating the right conditions to empower businesses to drive growth. Companies need the best possible environment to generate wealth and create jobs.

“The Government must stick to plan A, but also stimulate growth within the economy. There is room within the current spending envelope for measures that will encourage firms to export, invest and grow.

“Real deregulation, a simple easy-to-use planning system, improving the flow of credit to firms, and improving our lacklustre infrastructure and skills system – these are the measures businesses want to see from a government confident enough to take radical measures to squeeze every last drop of growth out of the UK economy.”

The BCC expects interest rates to remain at 0.5% until the final months of 2013, and then to rise gradually to 1% in the second quarter of 2014, after which the economy should return to pre-recession levels. Meanwhile the services sector, which accounts for three-quarters of the economy, grew at a slower pace than expected in February.

The Markit/CIPS Purchasing Managers’ Index fell to 53.8 from a 10-month peak of 56 in January, but remained above the 50 mark which separates growth from contraction.

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