By Max Clarke
• Largest economic survey of UK business shows strong growth in manufacturing, but service sector performance is still fragile
• UK private sector can drive growth during 2011, but Government must act forcefully to support businesses
The British Chambers of Commerce’s (BCC) latest Quarterly Economic Survey (QES), released today (Tuesday), suggests that the UK economy has continued growing in the fourth quarter of 2010, but at a slower pace than in the second and third quarters. The survey, combining over 5,600 responses from businesses across the UK, paints a mixed picture of the economy: while the indicators point to a strong manufacturing sector, performance in the service sector is weaker, raising concerns about a sustainable recovery.
In summary, the QES identifies the following trends:
• The QES results indicate that the UK economy has continued to expand in Q4 2010. But, in spite of strong manufacturing and improved export balances in both sectors, GDP growth has probably slowed in Q4 (relative to Q3) because of the inadequate performance of the service sector.
• Manufacturing will help to rebalance the UK economy, but persistent problems in the Eurozone cause serious difficulties for UK exporters. The service sector’s weaknesses are worrying, and unless reversed could have adverse consequences, particularly for jobs.
BUSINESS CONFIDENCE REMAINS HIGH
• The QES figures suggest that manufacturers are still confident of increasing their expected turnover and profitability in 2011. Turnover confidence remained near to a three-year high, moving down 1 point to +48%. Profitability confidence increased 7 points, to +30%, the highest level since Q4 2007.
• Similarly, both measures for the service sector are up, though they suggest firms in the sector are not as confident as earlier in 2010. The service sector’s turnover confidence balance rose 12 points, to +26%. Profitability confidence increased 13 points to +17%.
UK EXPORTS CONTINUE TO GROW
• In both manufacturing and services, the exporting figures signal an increase in both overseas sales and orders during the last quarter.
• In the manufacturing sector, the results reached their strongest level since Q4 1994. The manufacturing export sales balance soared 13 points to +37%, and export orders balance surged 21 points to +39%.
• The service sector figures suggest exports returning to levels not seen since before the recession in 2007, with export sales rising 10 points to +21% and export orders by 4 points to +12%.
EMPLOYMENT EXPECTATIONS MIXED
• Figures for the last three months suggest manufacturing firms have expanded their workforce, but this is not the case for services where figures have remained static.
• The balance of manufacturing firms growing their workforce over the last three months is still close to a record high, falling just one point to +23%. Expectations among these firms for employment over the next three months rose 3 points, to +11%.
• In the service sector, figures rose slightly but are still weak. Last quarter employment figures rose only 1 point to 0%, demonstrating neither growth, nor contraction. Expectations for employment among these firms rose 2 points, to +3%.
FIRMS EYEING PRICE RISES
• Firms across the UK are expecting to raise prices, possibly to cope with the impact of rising raw material costs and the VAT increase.
• The balance of manufacturing firms under pressure to increase prices surged 20 points in Q4 to +39%.
Commenting on the results, David Frost, Director General of the BCC, said:
“UK businesses have witnessed some of the toughest years in recent memory. Our latest economic survey points to some encouraging signs amongst UK firms, particularly in manufacturing. However, as the figures for the service sector show, we’re not out of the woods yet. Faced with public sector cuts and cost pressures, ensuring the health of UK businesses is critical to a sustained economic recovery.
“We must encourage more new start-ups, more employment, create stronger companies and support export potential. While the BCC’s survey points to our economy recovering, we call on the Government to take concerted action now to ensure recovery continues. Only a clear growth strategy set alongside existing plans for deficit reduction, will give businesses the confidence to growth through 2011 and beyond.”
David Kern, Chief Economist at the BCC, added:
“The QES results signal a slowdown in the pace of UK GDP quarterly growth, to only 0.4%-0.5% in Q4 2010. The strength of manufacturing will help to rebalance the economy, but persistent problems in the Eurozone will create difficulties for our exporters. The disappointing performance of the service sector is disturbing, particularly as we are yet to see the full impact of the VAT increase and deficit-cutting measures on these firms.
"Unless reversed, weaknesses in services could have adverse consequences, particularly for jobs. While we expect the private sector to prove sufficiently robust to withstand the impact of the tough deficit reduction programme, the UK recovery is fragile. Risks of a setback will be serious in the next few quarters. A new recession is unlikely, but the dangers cannot be shrugged off. The MPC and the Government must act forcefully to support growth.
“Given the dangers facing the economy, we urge the MPC to persevere with its current expansionary policies and maintain low interest rates until the recovery is more secure. On its part, the Government must support exporters and scrap onerous labour market regulations, so that the private sector can create new jobs and absorb the temporary job losses created by the fiscal austerity plan.”