11/07/11

  • David Frost: “Our economy is out of balance. The public sector is too large and the wealth-creating private sector is too small. We do not export enough goods and services, meaning we run up continual trade deficits.”
  • Results are more positive than in Q1, but there is no indication of solid growth, with a mixed picture across manufacturing and service sectors.
  • Cashflow is still a real problem for many businesses, particularly in the face of rising inflation and high raw material prices.
     

The British Chambers of Commerce’s latest Quarterly Economic Survey (QES) released today (Monday) suggests that economic growth in the UK remains weak. The survey results, combining 6,600 responses from businesses across the UK, are likely to have been negatively affected by the reduced number of working days in Q2. While the second quarter results are more positive than those in the first quarter, they highlight the threats still facing the economy.

Economic climate

  • The UK’s recovery is fragile, particularly at a time when the Government is continuing to reduce the deficit. The survey results support our assessment that GDP growth remained in positive territory in Q2. However, the economy is facing serious risks, and there is no room for complacency.
  • There are signals that the rebalancing of the economy towards net exports is not strong enough. The international background has become more uncertain, with worsening debt problems in the Eurozone , and concerns around the US housing market. Worrying signs that global growth is set to slow will add to the challenges facing UK exporters.


Exports

  • For both the manufacturing and services sectors, exporting activity remains stronger than domestic market performance. This suggests a sluggish domestic market in the UK, with businesses more likely to see growth from overseas than at home.
  • The balances show exporting activity in the manufacturing sector is stronger than in the service sector. However, they are not strong enough to suggest a rebalancing towards exports, with export sales balances in manufacturing falling (by four points to +26%), and rising only slightly in services (three points to +18%).


Business confidence

  • Manufacturers’ confidence in turnover and profitability improved in the second quarter, but remain at weaker levels than in the final three quarters of 2010. Lower business confidence negatively impacts businesses’ decision-making, recruitment and investment. The turnover confidence balance rose 12 points, to +40%, and the profitability confidence also improved 12 points, to +22%.
  • In the service sector, confidence in turnover fell slightly (by one point to +30%) and confidence in profitability remained the same at +10%, a disappointingly weak level.


Employment

  • Figures for the last three months showed no change in the balance of manufacturers expanding their workforce, and there has only been a slight improvement in services. In manufacturing, the balance of +15% is the weakest level since the final quarter of 2009, but stronger than those recorded during the recession. In services, the balance rose one point, to +5%, the strongest since Q2 2008, but still very weak in a historical context.
  • However, firms seem to be more optimistic about future recruitment. The balance of both services and manufacturing firms expecting to grow their workforce in the next three months rose to historically strong levels. In manufacturing, the balance rose six points to +15% the strongest level since Q3 2007. In services it rose two points, to +12%, the strongest level since Q1 2008.


Cashflow and price pressures

  • Businesses are still facing real difficulties in managing cashflow (the movement of cash in and out of the business). Despite marginal improvements in both sectors, both cashflow balances are still in negative territory. . Manufacturers have only recorded three positive results since Q1 2008. Services firms have not recorded a positive balance since the start of 2008.
  • Despite balances falling since the last quarter, businesses’ intentions to raise prices are still relatively high (likely due to rising raw material costs). The balance of manufacturing firms reporting pressure to increase prices fell two points, to +38%, and in services fell six points, to +27%.

 

Commenting on the results, David Frost, Director General of the BCC, said:
 
"Britain's economic recovery is continuing but the pace of growth is too slow, and our economy is out of balance. Wealth-creating businesses must be given the right conditions to create growth or there is a real chance that the economic recovery could be thrown off course. The public sector is too large and the private sector is too small. We do not export enough goods and services, meaning we run up continual trade deficits.
 
“We accept the need to persevere with painful measures to cut the deficit. But the government must move beyond the rhetoric of growth, and introduce radical reforms to help businesses export, invest and create more jobs.”


David Kern, Chief Economist at the BCC, said:
 
"Given the fragility of the economy, and the fact that there were fewer working days in Q2, the results are positive overall. The outcomes support our view that GDP growth remained in positive territory in the second quarter of the year, but the economy is still weak. We expect GDP quarterly growth in the second quarter at only 0.3%. Recent economic data suggests that the rebalancing of the economy towards net exports is still not strong enough. With the international situation becoming more uncertain, there are worrying signs that global growth is set to slow, and this will add to the challenges facing UK exporters.
 
"British business supports the efforts to reduce the deficit, and has rejected calls for a Plan B. Restoring stability to our public finances will protect Britain’s international credit rating and will strengthen our long-term growth performance. But businesses and consumers will have to cope with acute pressures in the short-term, and the economy is still very much at risk. To minimise dangers of a setback, the government must implement more growth-enhancing policies that will enable private sector firms to increase productivity and drive the recovery forward. On its part, the MPC must postpone premature interest rate increases while fiscal policy is still being tightened and wage pressures remain weak."

Ends

Notes to editors:
 
A full copy of the report here

Balance figures, referred to throughout this report, are determined by subtracting the percentage of companies reporting decreases in a factor from the percentage of companies reporting increases.
 
The British Chambers of Commerce Quarterly Economic Survey is the largest and most representative independent business survey of its kind in the UK. Each quarter, over 6,000 businesses – belonging to Chambers of Commerce in every region of the country – participate in the QES. Businesses are questioned on a wide range of issues, including: home sales and orders, export sales and orders, employment prospects, investment, recruitment difficulties, cashflow, confidence and price pressures.
 
The QES is the first economic indicator of the quarter, published in advance of official figures and other private surveys, and it consistently mirrors trends in the national economy. For this reason the survey is closely watched by policymakers such as the Treasury, the Bank of England and the new Office of Budget Responsibility.
 
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 over 100,000 businesses across the UK, which employ over five million people. For more information visit: http://www.britishchambers.org.uk/

Media contacts:

Liz Larvin
Tel: 020 7654 5813 / 07825746812
Email: l.larvin@britishchambers.org.uk

Lisa Morrison
Tel: 020 7654 5812 / 07717682221