By Daniel Hunter

The British Chambers of Commerce’s Quarterly Economic Survey (QES) released today (Tuesday) provides further evidence that the UK economy is healing.

The Q3 survey, made up of responses from more than 7,400 businesses, shows improvements in most key areas for both manufacturing and services compared with Q2, with many balances now stronger than their long-term historical averages.

In the manufacturing sector, six key balances are at all-time highs, and the service sector continues to go from strength to strength. We are pleased that confidence in the manufacturing sector has fuelled a temporary growth spurt, but it is too early to declare that the recovery is now secure — especially given risks both at home and abroad that still remain.

Key findings in the Q3 2013 Quarterly Economic Survey:

- For both manufacturing and services, most key balances are stronger in Q3 than in Q2, with critical balances now stronger than long-term historical averages.

- Several key manufacturing balances are at all-time highs, but this could be due to a temporary spurt: home deliveries (+38%); employment (+32%); employment expectations (+29%); cashflow (+22%); turnover confidence (+66%) and operating at full capacity (+46%).

- Employment also rose in the services sector to +20%, and is at its best level since 2007.

- Business confidence in turnover and profitability remains high. In both manufacturing (+66% and +46% respectively) and services (+58% and +39%) these figures are all above pre-recession levels.

- But there are some concerns. Investment in plant and machinery in the manufacturing sector fell, and is lower than in 2007, despite the full capacity balance being at a record high.

- Several key services balances are still lower than pre-recession levels, even though they improved this quarter: employment expectations (+26%), cashflow (+12%), both investment balances (+17% for machinery, +24% for training), and profitability confidence (+39%).

- Both export balances in the service sector (sales and orders) fell slightly but remain at historically high levels.

- Pressure to raise prices increased in Q3. In manufacturing, this rose 12 points to +27%, and in services, the balance increased 11 points to +23%. Raw material costs were given as one of the main factors in both sectors.

Overall, the Q3 results support our view that the recovery is strengthening, but significant challenges remain.

“We have long-championed the idea that businesses up and down the country have remained confident about their abilities to grow. Even more firms now believe they can increase their turnover and sales, and hire more staff, which is a testament to their hard-work, creativity and ambition," John Longworth, Director General of the BCC, said.

“It is fantastic to see our small yet dynamic manufacturing sector doing so well, with our results suggesting a recent growth spurt. However, we need to ensure that this does not become an aberration, but rather the norm, particularly when the economic recovery is still facing external risks.

“Investment is still a concern, and if we are to have a high productivity, high skill, high wage economy then this needs to improve. We have seen many false dawns in recent years and if we are to create the ‘land of opportunity for all’ that the Prime Minister spoke about only last week, we need swift delivery of promises made.

"This includes de-risking private investment in infrastructure to get diggers in the ground, which will help firms move their people and goods around the country in the long term. We still need more support for exporters through increased trade promotion, and better access to finance will also grease the wheels and enable high-growth businesses take the leap towards ‘going global’.

“The government mustn’t get distracted, and has to put growth first at all times. We will be looking ahead to the Autumn Statement in the hope that the Chancellor uses this opportunity to make a real difference and go all out in the name of growth. As we get closer to the General Election, political parties must not be drawn into politicking for cheap votes at the expense of clear, long-term policies that will help build a truly great economy.”

David Kern, Chief Economist at the BCC, said: “It’s clear that the UK upturn is gathering momentum, with most key balances in this quarter higher than their pre-recession levels in 2007. On the basis of these results, GDP growth in Q3 could well be around 0.9-1.0%, with our full-year forecasts for 2013 and 2014 likely to be revised up further. However these strong results must not lull us into a false sense of security.

“Growth will continue, but it is likely to slow slightly following this recent spurt. External shocks from the US shutdown, possible debt default and tapering, and continued risks elsewhere in the world could all impact on our fragile recovery. At home, the impact of reducing the deficit, fixing the banking system, and the relentless squeeze on living standards will inevitably act as a constraint on growth in the next few years.

“All this means that it is vital to sustain the recovery and avoid setbacks. The MPC must continue its forward guidance on interest rates, and must work to bring inflation down without increasing its QE programme. On its part, the government must switch policy priorities towards measures to boost growth such as infrastructure investment, cutting business rates and taxes, promoting exports, and boosting the flow of lending to growing businesses through a fully-funded Business Bank.”

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