Economic survey points to continued UK growth

Key indicators on business conditions, such as employment expectations, investment plans, export orders, and domestic sales – in both the manufacturing and service sectors – made gains in Q2.

Despite the encouraging results, the BCC warns that underlying weaknesses in the economy remain, which cannot be ignored if we are to avoid a relapse into recession. The business group highlights sluggish growth in the service sector as a serious concern, and more specifically, a huge number of manufacturers (around 80%) are now reporting that the cost of raw materials is increasing, adding to price pressures.

The economic data, collected from over 5,600 businesses across every region of the country, is released just days ahead of the Monetary Policy Committee’s July interest rate decision.

The highlights from the Q2 QES include:

• Manufacturing home sales surged by 29 points in Q2, to +30%; a level not seen since the last quarter of 2007. The service sector’s domestic sales rose 6 points, to +12%.

• Manufacturing export sales increased by 11 points, to +31%; its highest level since Q3 2006 and an indication that exporters are benefiting from a more competitive exchange rate. The service sector’s export balances recorded modest increases and they remain weak by historical standards.

• Employment in manufacturing saw a big improvement in Q2, rising 35 points to +19%. Manufacturing employment expectations also increased by 16 points, to +14%. Employment in services edged up by just 1 point, to +4%, while employment expectations rose 3 points, to +11%.

• One of the most worrying aspects of this quarter’s results is the pressure manufacturing firms are facing to increase prices, driven by the cost of raw materials. The balance of manufacturers reporting pressure to raise their prices surged 22 points in Q2, to +30%, which is the highest figure this survey has seen since Q3 2008.

• Confidence improved among manufacturers in Q2. However, the service sector’s confidence measures weakened – a disappointing setback at this early stage of the recovery.

• Manufacturing’s cash flow improved by 10 points, to +1%. Services cash flow improved 6 points, but remains negative at -3%.

Commenting on the results, David Frost, director general of the BCC, said:

“On the whole these results are positive, especially in manufacturing, and they should offer encouragement that the UK’s recovery remains on the right track.

“We still have concerns about sluggish growth in the service sector, which emphasises why the Government must continue to promote the best possible business environment, in order to help companies invest and grow. Furthermore, with around 80% of manufacturers reporting that they are under pressure to increase prices, there is potentially a big issue bubbling under the surface.

“With very austere times ahead, no one should kid themselves into thinking that the UK’s economic recovery is totally secure. There will need to be an unwavering focus on ensuring business is able to deliver growth, create jobs, and drive a lasting recovery. Interest rates will have to stay low for longer, burdensome new employment red tape must be blocked, and we will have to generate growth across all regions of the country.”

David Kern, Chief Economist at the BCC, added:

“The UK’s economic recovery is consolidating, and these results support the view that GDP growth strengthened in the second quarter of 2010. However, the recovery is fragile and is not yet secure.

“Despite an improvement in manufacturing, the sector still faces serious risks. Given the sector’s poor long-term historical record, it is much too early to conclude that we are now seeing a sustainable manufacturing upturn. The service sector, which accounts for the bulk of GDP in the UK, is not recovering at an adequate pace and this heightens the threat of an economic setback.

“This quarter’s poor cash flow data, in both manufacturing and services, indicates that many businesses are still facing serious financial difficulties. Investment and confidence levels remain disappointing across all sectors.

“Many of the factors driving growth this year, mainly stock building and the continued effects of the policy stimulus, are only temporary. As a result, the threats of a relapse remain serious, and countering these threats to growth must remain a priority for policymakers.

“As the Government has now embarked on the vital task of curbing the UK’s unsustainable budget deficit, it is essential to create the right business conditions that will enable wealth creating companies to drive a lasting recovery – with a rebalanced economy focused on investment and exports at its heart.”