Worst of recession is over but recovery is not guaranteed
Manufacturing recorded stronger improvements in Q2 than services, although in absolute terms, the manufacturing sector remains in a worse condition overall.
Themost encouraging feature of the Q2 results is a marked strengthening in confidence following sharp declines over the previous two quarters. Turnover confidence has now entered positive territory for the first time since Q3 last year and it has improved dramatically for manufacturing firms, rising 40 points from -38 in Q1 to +2 in Q2.
Employment expectations in both sectors saw gains this quarter, but the BCC continues to predict unemployment will reach 3.2 million - some 10% of the workforce - by mid 2010.
While these results finally point to some good economic news, there is a risk that without a continued focus on limiting the impact of recession, the economy could drop-off suddenly, adding weight to the argument that we are heading towards a W-shaped recession. With official GDP figures revised heavily downwards only last week, it is far too early to say that recovery is secure.
Commenting, British Chambers of Commerce Director General, David Frost, said:“These results are sending Gordon Brown and Alistair Darling a strong message from the business community. It is absolutely vital that the improvement in business confidence is nurtured.
“Our economy is based on confidence, and wealth-creating businesses need to know they will be given the freedom and flexibility to drive the UK out of recession and into a sustainable recovery.
“The government needs to think long and hard about its policies on taxation and red tape, which threaten to stifle growth and employment. The planned increase in National Insurance contributions is nothing more than a tax on jobs and it should be abandoned immediately.
“Signs of improvement in the economy cannot be an excuse for the government to start increasing business tax as a remedy for the ill health of the nation's finances. Risking any fragile gains would be a huge mistake.”
David Kern, Chief Economist at the BCC, added: “The pace of decline in the UK economy is clearly moderating. The worst phase of the recession is over, but serious downward pressures persist across all sectors and regions. Most key balances are still in negative territory and remain weak by historical standards. Recovery is now possible but it is not yet secure.
“Further corrective measures are still needed to support the economy. The marked improvement in confidence, albeit from exceptionally low levels, is welcome. However, these recent gains can only be sustained if the economy continues to stabilise and the recession ends.
“With cashflow, capacity utilisation, and price pressures remaining weak, it is important that the short-term policy stance stays expansionary. Quantitative easing should be pursued aggressively.
“At the same time, sustaining any future recovery and preserving Britain's international credit rating, depends heavily on the adoption of a credible medium-term strategy for improving our public finances. To avoid undue damage to our productive base, painful cuts to spending programmes must be the main tool for repairing our public finances.”
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