The British Chambers of Commerce's latest Quarterly Economic Survey (QES), released today (Tuesday) suggests that while the UK economy has returned to positive growth, the disappointing results highlight the fragility of the recovery. The Q1 survey, combining 6,000 responses from businesses across the UK, is likely to have been negatively affected by the weather-related disruptions in December; however, this aside, the overall picture is still worrying.

While balances for the manufacturing sector remain positive and exports are still strong, there has been a worsening across all the key balances, pointing to a difficult economic environment in Q1. The service sector shows mixed results. Though many balances have risen in the last quarter, the improvement is slight and still inadequate.

In summary, the survey identifies the following trends:

Economic climate

• Following the increase in VAT and as tough spending cuts begin to bite, the survey results suggest that the UK economy is still fragile. The results of the BCC's Q1 QES are mediocre and disappointing, particularly for manufacturing.

• Since disruptions resulting from the severe weather conditions in December have probably artificially depressed some of the balances in the current survey, we believe the economy has returned to positive growth in Q1. However, the upturn in Q1 is likely to have been only slightly larger than the decline of 0.5% seen in Q4 2010.

Exports

• Export activity fell slightly but remains strong, particularly in the manufacturing sector. The manufacturing export sales balance fell seven points, to +30%. The manufacturing export orders balance fell 13 points, to +26%. Both manufacturing balances remain relatively high in absolute terms.
• For both sectors, the export balances remain stronger than the home balances. This suggests a sluggish domestic market in the UK, with businesses are more likely to see growth from overseas than at home.

• The service export sales balance fell six points, to +15%. The service export orders balance rose four points, to +16%, the highest level since Q1 2007. The Q1 export balances remain stronger for manufacturing than for services.

Business confidence falls

• The QES figures suggest that manufacturers are much less confident of increasing their expected turnover and profitability over the next 12 months than they were in Q4 2010. Turnover and profitability confidence has fallen to levels not seen since Q2 2009 (turnover figures falling 20 points to +28% and profitability down 20 points to +10%).
• In the service sector confidence in future turnover grew slightly by five points to +31%, the highest since Q1 2010. However, service sector firms are less confident of increasing their profit in the next 12 months, with the balance figure falling seven points to +10%, a disappointingly weak level.

• Lower business confidence negatively impacts businesses' decision-making, recruitment and investment; for example key employment balances for both manufacturing and service sectors worsened. The manufacturing employment balance fell eight points, to +15%, the weakest since Q1 2010 but still much stronger than during the recession. The service employment balance rose four points, to +4%, equal best to Q2 2008 but still a weak level.

Cashflow still a real problem

• Businesses are still facing real difficulties in managing cashflow (the movement of cash in and out of the business). The figures suggest business cashflows have been badly affected by recent shocks such as adverse weather conditions, and the VAT increase.

• The cashflow balances in this quarter's QES worsened markedly, moving into negative territory. For manufacturing firms, the cashflow balance plunged 18 points to -4%, the worst since Q1 2010. Services cashflow fell 10 points to -10%.

More pressure to increase prices

• Rising raw material costs mean firms are more likely to raise prices; however, the pressure to increase wages remains stable.
• Figures show the balance of manufacturing firms wanting to increase prices has risen by one point to +40%. 80% of these firms state raw material costs are adding to pressures on them to increase prices.

• In the service sector the balance of service firms expecting to raise prices rose five points, to +33%. Balances for both sectors the highest since Q3 2008.

 

Commenting on the results, David Frost, Director General of the BCC, said:

"The results of the Quarterly Economic Survey show our economy faces a difficult year and that the recovery will be choppy. Exporting activity remains strong, but there have been sharp declines in confidence, and cashflow is still a real concern for businesses.

"While the Government has listened to calls to help the private sector create growth, there is more to be done in giving businesses greater confidence, and encouraging them to export, invest and create more jobs. As the public sector cuts start to bite, the Government must get the detail right on the measures announced in the Budget to generate economic growth by helping businesses thrive."

 

David Kern, Chief Economist at the BCC, added:

"The Q1 QES results highlight the fragility of the UK economy in the early months of 2011, following the increase in VAT and the first wave of the Government's tough spending cuts. The results are mediocre and disappointing, particularly for manufacturing.

"Since disruptions resulting from the severe weather conditions in December have probably artificially depressed some of the balances in the current survey, we believe the economy has returned to positive growth in Q1 2011. However the upturn in Q1 is likely to have been only slightly larger than the decline recorded in Q4 2010. This means that the level of output this quarter was only marginally higher than in Q3 2010.

"Benefiting from a competitive exchange rate, manufacturing still has the potential to drive the UK recovery. But the international background has become riskier for Britain's exporters, while the domestic austerity plan will intensify pressures on businesses and consumers. In addition, the mediocre performance of the service sector will hinder the number of new jobs created this year. Given the underlying uncertainties, the MPC must avoid premature interest rate increases that may