By Claire West

Results from the British Chambers of Commerce’s latest Quarterly Economic Survey (QES), with over 5,000 business responses, suggest that the UK economy slowed considerably in the third quarter of 2010, following unusually strong growth recorded in the second quarter of the year. But UK growth remained in positive territory, and a new recession can be avoided.

The manufacturing sector experienced a weakening of some balances, although there were positive aspects. Results from the service sector showed performance to be worse than the manufacturing sector, with all key service sector indicators, such as employment expectations and investment, slowing.

Despite the economy’s continued growth, serious challenges will be faced by the business community over the coming year as the austerity measures are implemented. To reduce the dangers of a major economic setback, forceful action must be taken by the Government and the Monetary Policy Committee.

The major highlights from the Q3 QES include:

· The manufacturing sector turnover confidence balance rose seven points, to +49%, the strongest result since Q3 2007. However, manufacturers’ profitability confidence declined by three points to reach +23%.

· The service sector home orders balance fell nine points to —4%, dropping into negative territory after being positive in Q2. The service domestic balances, though much weaker than those for manufacturing, are still better than during the recession.

· The service sector employment expectations balance declined 10 points, to +1%, indicating the inability of firms to take on staff as 2010 ends.

· The Q3 cashflow balances worsened in both sectors and are worryingly weak. The manufacturing cashflow balance fell one point, to 0%. Services cashflow dropped eight points, to —11%.

Commenting on the results, David Frost, Director General of the BCC, said:

“Overall, these results are disappointing, particularly for the service sector - although they did show that manufacturing was significantly stronger in the third quarter. These results highlight the fact that wealth-creating businesses must be supported for Britain to achieve a sustainable recovery.

“Businesses accept the Government’s austerity measures. But now it’s time to shift the national debate from cuts to what needs to be done to grow the UK economy. The private sector will do the heavy lifting — but the Government must play its part by supporting capital investment in crucial infrastructure projects. Businesses must be given the freedom to create jobs and wealth, exporters must be supported more actively, and the burden of red tape on employers should be reduced or scrapped wherever possible”.

David Kern, Chief Economist at the BCC, added:

“The results for the third quarter of this year show a marked slowdown in the pace of the recovery. The dismal performance of the service sector is particularly disturbing, since it occurs even before VAT is due to rise to 20%, and before the full impact of the tough deficit-cutting measures take effect. The results also show worrying falls in all the export balances, at a time when rebalancing the economy must be a key aim.

“However, it is important not to overstate the gloom. Growth remains in positive territory, and a new recession can be avoided. But the UK will face huge challenges over the year ahead. With worrying signs that the global economy may slow over the coming months, and with the public sector’s share in the UK economy set to shrink, it is vital to take forceful steps to sustain the recovery and support the private sector.

“Risks of a setback are likely to remain serious for a considerable time, which is why it is essential for interest rates to be kept at very low levels for an extended period. But this is not enough. The MPC should seriously consider increasing the quantitative easing programme to £250 billion before the end of 2010, to enhance the economy’s ability to cope. Reducing threats of a double-dip recession must be the main policy priority.”