By Daniel Hunter
The British Chambers of Commerce's Quarterly Economic Survey (QES) shows that the economy has made further progress, but that there are still some risks at home and abroad that could derail the recovery.
The new survey, made up of responses from over 7,400 businesses, shows that most key balances strengthened in Q2 2013 compared with the previous quarter. The export balances remain strong, with the services export deliveries balance reaching its highest level (+36%) since our survey began. It is encouraging to see employment balances rise, after they fell in the previous quarter.
Despite these welcome improvements, most indicators remain below their 2007 pre-recession levels, and it is disappointing that cashflow remains weak, while service investment balances fell in the quarter.
The findings suggest that the economy will continue to strengthen gradually over the next year, with growth slowly improving. The results also demonstrate resilience among UK businesses, who continue to feel confident and are looking to invest and increase exports this year.
Key findings in the Q2 2013 BCC survey:
- For both manufacturing and services, most key domestic balances are stronger in Q2 than in Q1, but in both sectors they remain below pre-recession levels seen in 2007.
- Export balances remain strong: service deliveries rose three points to +36% (the highest since the survey started in 1989) while orders rose three points to +29% (the highest since 1994).
- Employment balances rose in Q2, following their Q1 decline. In manufacturing, the balance improved from +11% in Q1 to +19% in Q2; in services, it improved from +6% to +15%.
- Business confidence has again increased, and is much stronger than average levels during the recession. Manufacturing confidence that turnover will improve rose seven points to +51%; service sector confidence rose six points to +46%. Profitability confidence rose from +33% to +39% for manufacturing, and from +22% to +34% in services.
- The investment picture however was mixed. While the balance of manufacturing firms looking to increase investment in plant and machinery rose nine points to +23%, for services it fell two points to +7%.
- Pressure to raise prices continued to ease in Q2. In manufacturing, this fell by five points to +12%, with many citing reduced pressures from raw materials. For services, the balance fell by seven points to +12%, low by historical standards.
- Cashflow balances are weak in both sectors. While manufacturing increased two points to +4%, the services sector recorded a five point drop and now sits at +1%. For services this remains 20 points below its 1997 peak.
- Overall, the Q2 results support our view that the economy will gradually strengthen over the next year, but challenges remain.
Commenting on the results, John Longworth, Director General of the BCC, said: "Despite gloomy media headlines in recent months, our economic survey once again shows increased business confidence. UK firms are determined to make progress.
"It is incredibly encouraging to see export deliveries reach record levels, and the upturn in employment balances is reassuring in spite of the risks at home and abroad. However the falls in the service investment balances and the weak cashflow balances in both sectors are a warning that economic growth could be slow, and a reminder that a sustained upturn cannot be taken for granted. For these reasons, business access to finance, and working capital in particular, must be assured.
"British firms are doing their utmost to drive recovery. The sheer strength of our export balances shows that companies have untapped potential to expand. It must be recognised that recovery will only be turbo-charged if we can create a truly enterprise-friendly economy here in the UK. That, in turn, requires swift delivery of the infrastructure boost promised in the Spending Review, more support for exporters seeking to enter new markets, far more action on finance for growing companies, and a relentless government commitment to enabling the private sector to generate wealth and prosperity.
"If we want Britain's economy to be great, rather than just good, pro-growth policies will need to continue for decades to come. Otherwise, we may be in for a long and slow road to recovery - a prospect with little appeal for either business or government."
David Kern, BCC Chief Economist, said: "The improvement in most key balances in our Q2 survey supports our view that the UK upturn is slowly strengthening. The recent revisions to historic GDP data show that previous fears of a double dip were misguided. If recent progress is sustained, we could even see quarterly GDP growth of 0.6% in Q2 2013. The remarkable export balances show that the service sector is capable of increasing its trade surplus over time and can work to reduce our overall trade deficit. Developing the export potential of this sector is critical to long-term prosperity.
"However serious risks remain for the economy at home and abroad. Domestic inflation has increased again, and this risks worsening the squeeze on businesses and consumers. Looking abroad, with the US planning to reduce its stimulus and continued problems with the eurozone, our exporters continue to face difficulties in selling their wares overseas.
"To support UK firms, the MPC must avoid steps, such as adding to QE, which could trigger a further rise in inflation. At the same time, the MPC should also strive to keep interest rates low to encourage businesses to invest. The government should also play a role by giving greater support to exporters, and providing access to finance for dynamic, viable businesses."
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