SERVICE SECTOR WEAKNESS REINFORCES NEED FOR NOVEMBER INTEREST RATE CUT
11/10/07 | 09:08
The Service Sector has recorded worrying Q3 falls in its balances for both domestic and export sales and orders. Balances for plant & machinery investment, and employment expectations are weaker. Though cashflow and confidence are stronger, the service sector’s overall Q3 performance clearly worsened.
The Manufacturing Sector performed more strongly than the Service Sector but the results are still mixed. Balances for employment, employment expectations and investment are stronger yet cash flow is weaker and lower confidence balances are a cause for concern.
David Kern, economic adviser to the British Chambers of Commerce, said:
“The results of this survey show that the MPC must cut interest rates in November. An early cut in interest rates will reduce the need for larger and riskier cuts later on.
“Small businesses face growing threats in the year ahead. The Chancellor has this week reduced his growth forecast whilst using the PBR to hit entrepreneurs. By reducing rates next month the MPC can help businesses through what are likely to turbulent times.”
ENDS
QES Q3 2007 Summary : Download PDF
QES Q3 2007 Data Table : Download PDF
MEDIA CONTACT:NOTES TO EDITORS:Introduction
The Q3 2007 results are mixed; but they signal an overall weakening in economic performance. Many manufacturing balances are strong, but most service sector balances recorded disappointing declines. Manufacturing sector balances are stronger for home sales, but weaker for home orders. Export sales are marginally lower, but export orders are unchanged. Manufacturing balances for employment, employment expectations and investment are stronger; but cashflow is weaker, and lower confidence balances are a cause for concern. The service sector recorded worrying Q3 falls in its balances for domestic sales & orders, and export sales & orders. Service Q3 balances for plant & machinery investment, and employment expectations, are weaker. Though cashflow and confidence are stronger, the service sector’s overall Q3 performance clearly worsened. Intentions to raise prices in Q3 were stronger for manufacturing and unchanged for services; but price pressures in both sectors are well below the Q4 2006 peaks.
The Domestic Market
The manufacturing sector’s domestic balances recorded mixed movements. The net balance for home sales rose to +36% in Q3, from +31% in Q2, and was highest equal on record (since the current series started in 1989). The balance for manufacturers’ home orders fell 3 points in Q3 to +26%, still a historically high level. The service sector’s domestic balances recorded falls in Q3, but both remained at adequate levels. The net balance for home sales fell 7 points to +29%. The net balance for home orders fell 1 point to +23%, lowest since Q3 2006. The Q3 service sector home balances are weaker than the Q3 manufacturing balances.
Export market The manufacturing sector’s export performance worsened marginally in Q3, but the Q2 gains were mostly kept. The export sales balance fell 1 point to +29%. The export orders balance remained unchanged, at +26%. The service sector’s export balances worsened in Q3 for the third month in a row. The balance for export sales fell 2 points to +18%. The balance for export orders fell 2 points to +11%. Both balances were at their lowest since Q4 2004.
Employment
The manufacturing employment balance rose 3 points in Q3 to +20%, highest since Q3 1996. The employment expectations balance rose 5 points to +19%, highest since Q1 2005. In the service sector, the employment balance was unchanged, at +21%. The employment expectations balance fell 9 points to +24%, lowest since Q4 2006.
Investment
The Q3 manufacturing figures rose further. The balance of firms planning to increase investment in plant & machinery rose 5 points to +33%, a record high. Intentions to invest in training rose by 13 points to +35%, also a record high. In services, the balance of firms planning to increase investment in plant & machinery fell 2 points to +17%, lowest since Q2 2006. The service balance for intentions to invest in training rose 1 point to +32%. Business Confidence The manufacturing sector's turnover confidence balance fell 9 points in Q3, to +52%, still satisfactory. Manufacturing profitability confidence fell 2 points to +35%, still adequate. The service sector’s Q3 confidence balances recorded improvements, and are relatively high. Turnover confidence increased 4 points to +59%. Profitability confidence rose 1 point to +47%. Capacity Utilisation and Cashflow The proportion of manufacturing firms operating at full capacity rose 7 points in Q3, to +45%. In services, 42% of firms worked at full capacity in Q3, up 2 points. Manufacturing cashflow fell 3 points in Q3 to +14%. Services cashflow rose 1 point in Q3, to +16%.
Prices
The balance of manufacturing firms reporting pressure to raise prices increased 8 points in Q3, to +32%. In services, the balance of firms expecting to raise prices was unchanged, at +28%. Both Q3 balances are below Q4 2006 peaks.
Economic Climate
Economic prospects, UK & global, have worsened following the Northern Rock crisis and the wider credit problems. The Q3 QES results are mixed. Though many manufacturing balances are strong, most service sector balances show disappointing falls. Given the weight of services in GDP, the Q3 results point to weaker overall performance. Manufacturing sector balances are stronger for home sales, but weaker for home orders. Manufacturing balances improved for employment, employment expectations and investment; but cashflow is weaker, and lower confidence balances are a cause for concern. The service sector recorded Q3 falls in its balances for domestic sales & orders, export sales & orders, plant & machinery investment, and employment expectations. Though cashflow and confidence are stronger, the service sector’s overall Q3 performance clearly worsened. Intentions to raise prices in Q3 were stronger for manufacturing, and unchanged for services. Relatively strong price pressures, though below the Q4 2006 peaks, signal risks of stagflation. The UK economy is set to slow markedly, and small firms could face problems. Lower interest rates will clearly be needed; but additional measures will be required, to ease tax and regulatory burdens facing businesses.
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.