WEAKER GROWTH AND STRONGER PRICE PRESSURES SIGNAL DIFFICULT BUSINESS ENVIRONMENT AND TOUGH POLICY CHOICES
17/01/08 | 10:13
The Q4 results are negative with most critical balances for both the manufacturing and services falling. Of particular concern for the service sector are export balances which are disturbingly weak while profitability confidence has plummeted by 17 points. The manufacturing sector also saw export performance worsen markedly in Q4, with plans to increase investment in plant and machinery falling by 12 points.
Across both the services and manufacturing sectors the pressure on pricing is worrying. The balance of manufacturing firms reporting pressure to raise prices rose 9 points in Q4 to +41%, an all time high. In services, the balance of firms expecting to increase prices rose 12 points, to +40%, also an all time high.
David Kern, economic adviser to the British Chambers of Commerce, said:
“The latest results show the tough position that the MPC is in as it contemplates its next move. “Overall, the Survey results are negative. The critical balances for both manufacturing and services have fallen, with exports being of particular concern. The pressure that many firms are feeling on pricing show inflationary pressures that may be hard to keep a lid on.
“Talk of recession however is unjustified and must be strongly resisted. If the right policies are adopted the damage associated with an economic slowdown can be limited. Inflationary concerns cannot be shrugged off but a small interest rate cut early in 2008 will alleviate the credit squeeze, prevent a major confidence loss, and reduce the need for dangerous emergency measures later in the year.”
ENDS
QES Q4 2007 Summary : Download PDF
QES Q4 2007 Data Table : Download PDF
MEDIA CONTACT:NOTES TO EDITORS:Introduction
The Q4 2007 results are negative. Most critical balances are down. In the manufacturing sector the domestic and confidence balances are mixed: Home sales fell, while home orders are unchanged; confidence is weaker for turnover but higher for profitability. But Q4 manufacturing balances fell sharply for exports sales & orders, employment, employment expectations, investment, and cashflow. While some manufacturing balances are still adequate, the overall trend is clearly down. The service sector recorded very disturbing falls. Though employment expectations rose, all other key service balances fell: home sales & orders, exports sales & orders, employment, investment, cashflow, and both confidence balances. The key home and export balances are weaker for services than for manufacturing. Intentions to raise prices rose to new peaks in Q4, for both manufacturing and services, making the MPC’s job more difficult. Though capacity utilisation rose to historic highs, the UK economy is set to slow markedly and small firms are most vulnerable. Modest interest rate cuts will be needed in the near term; but inflation risks are worsening, and the MPC’s room for manoeuvre is limited.
The Domestic Market
The manufacturing sector’s domestic balances recorded mixed movements. The net balance for home sales fell to +32% in Q4, from +37% in Q3, after +31% in Q2. The balance for manufacturers’ home orders was unchanged in Q4, at +27%, still a relatively high level.
The service sector’s domestic balances recorded falls in Q4. The net balance for home sales fell 1 point to +28%. The net balance for home orders fell 8 points to +18%, lowest since, and equal to Q4 2005 and at a worryingly weak level. The Q4 service sector home balances are weaker than the Q4 manufacturing balances.
Export market
The manufacturing sector’s export performance worsened markedly in Q4. The export sales balance fell 9 points to +22%, lowest since Q1 2007. The export orders balance fell 10 points, to +19%, lowest since Q2 2006. The service sector’s export balances also declined in Q4, and are now disturbingly weak. The balance for export sales fell 10 points to +15%, lowest since Q4 2005. The balance for export orders fell 1 point to +11%, also lowest since Q4 2005.
Employment
The manufacturing employment balance fell 9 points in Q4, to +11%. The employment expectations balance fell 11 points, to +8%, lowest since Q4 2005. In the service sector, the employment balance fell 4 points, to +17%. The employment expectations balance rose 5 points, to +29%. Investment
The Q4 balance of manufacturing firms planning to increase investment in plant & machinery fell 12 points to +21%. Intentions to invest in training fell by 9 points to +24%. In services, the balance of firms planning to increase investment in plant & machinery fell 3 points to +14%, lowest since Q4 2005. The service balance for intentions to invest in training fell 5 points to +27%.
Business Confidence
The manufacturing sector’s turnover confidence balance fell 6 points in Q4, to +46%, lowest since Q1 2006. Manufacturing profitability confidence rose 4 points to +39%, a satisfactory level. The service sector’s Q4 confidence balances recorded large falls. Turnover confidence fell 9 points to +50%, lowest since Q4 2005. Profitability confidence plummeted 17 points to +30%, lowest since, and equal to Q3 2005.
Capacity Utilisation and Cashflow
The balance of manufacturing firms operating at full capacity rose 1 point in Q4, to +46%, an all time high. In services, +46% of firms worked at full capacity, up 6 points, highest since Q4 1996. Both cashflow balances fell in Q4 and are weak: manufacturing fell 6 points, to +8%, and services fell 6 points to +10%.
Prices
The balance of manufacturing firms reporting pressure to raise prices rose 9 points in Q4, to +41%, an all time high. In services, the balance of firms expecting to increase prices rose 12 points, to +40%, also an all time high.
Economic Climate
The Q4 QES results signal a sharp worsening in UK prospects, mainly due to the damaging impact of the global credit crisis. Most critical balances fell in Q4, for both manufacturing and services. Prospects are poor for both sectors, but the vital home and export balances are weaker for services than for manufacturing. The export balances are disturbingly weak, particularly for services. Q4 capacity utilisation rose to historic highs, mainly due to strong growth earlier in the year. But the UK economy is set to slow very markedly. Small firms are most vulnerable. With intentions to raise prices at new peaks in Q4, the MPC cannot ignore the threat of inflation. But in a weak environment, with disposable incomes under pressure, firms are unlikely to secure the price increases they plan. The acute threats to growth still point to the need for lower interest rates. Inflation cannot be shrugged off. But small interest rate cuts early in 2008 will alleviate the credit squeeze, prevent a major confidence loss, and reduce the need for dangerous emergency measures later in the year.
The British Chambers of Commerce (BCC) is the National Voice of Local Business.
The BCC sits at the heart of a powerful nationwide network of Accredited Chambers of Commerce serving business across the UK, which employ over five million people.