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Double-dip avoided but risks to the economy remain

Results from the Quarter 1 2010 British Chambers of Commerce Economic Survey show that the UK’s upturn is still on course and the economy has not slipped back into recession.

CITY & CORPORATE

Double-dip avoided but risks to the economy remain

However, the recovery is weak and serious risks of a setback remain. Data from over 5,500 businesses show that the service sector’s performance is improving, with most indicators now positive and making gains on the previous quarter. The results in manufacturing are disappointing with too many key measures worsening, and several still in negative territory.

Highlights from the Q1 QES include:

Confidence, although weak by pre-recession standards, is firmly in positive territory confirming businesses’ resilience in the aftermath of the recession.
Exports have mostly improved and remain strong for manufacturing. Export orders grew from +17 in Q4 to +21 in Q1 – a highlight of this quarter’s survey.
Worryingly, critical indicators such as investment in plant and machinery and cash flow are still negative across both sectors.
In manufacturing, the key domestic measures point to stagnation in Q1 - with sales barely positive and orders still negative. In services, both sales and orders have turned positive.
Employment over the last three months in manufacturing has recorded a large decline. It has moved back into negative territory from +3 in the fourth quarter to -16 in Q1.

Commenting on the results, David Frost, Director General of the British Chambers of Commerce, said:

“Although these results are mixed, they contain some positive features - most notably the service sector’s improvement and relatively strong export balances for manufacturers.

“Businesses are showing resilience despite difficult and uncertain trading conditions. Confidence is building, and the Government must nurture this with well-thought out policies that support business growth and job creation. Special attention must be paid to bolstering our exports in goods and services, which will help rebalance the economy away from an over-reliance on debt and the public sector.

“Whatever the result of the General Election, a new Government must avoid additional business taxes that could stifle recovery. Within the first 90 days of a new administration, the 1% hike to employers’ National Insurance Contributions, planned for 2011, should be scrapped and replaced by a less damaging 1% rise in VAT.

“With companies facing an extra £25.6bn in costs stemming from new employment laws and taxes over the coming four years, there should also be a three-year moratorium on any new employment legislation. These are measures that will boost confidence and investment, create jobs and drive recovery over the long-term.”

David Kern, Chief Economist at the BCC, added: “These results support the view that GDP growth stayed positive in Q1, but the recovery is set to remain fragile and sluggish. While the upturn in the service sector is gradually gathering momentum, the manufacturing sector is still struggling to enter the recovery phase.

“It is disturbing that the measures for investment in plant and machinery have worsened, and are still negative across both manufacturing and services. Unless the sharp declines in capital investment are reversed, the UK’s productivity will plummet further and the economy will lack the capacity to meet growing demand when the recovery gains momentum.

“The negative cash flow balances in both sectors indicate that many businesses are still facing serious financial pressures, although this is often due to lack of demand, rather than to reluctance on the part of the banks to lend.

“With pressures on capacity modest and price pressures mostly under control, it is important that the MPC maintains an expansionary stance to reduce the risk of an economic setback.

“Whatever the outcome of the election, a new Government must produce a more credible medium-term plan for cutting the country’s huge Budget deficit and reducing spending. This will strengthen Britain’s credit rating, make it easier for the MPC to keep interest rates low for a prolonged period, and underpin the recovery.”

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