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BCC: Encouraging signs from UK businesses, but growth is still too slow

03 April 2012

The British Chambers of Commerce (BCC) Quarterly Economic Survey for Q1 2012 shows encouraging signs of growth, but the pace of recovery is still too slow. The new survey, comprising almost 8,000 responses from businesses across the UK, shows a welcome improvement on the results of Q4 2011 which pointed towards stagflation.

John Longworth, Director General of the BCC
John Longworth, Director General of the BCC

While the results are more encouraging than the previous quarter, they show that growth is still too weak, with the balances still below those seen in 2007 before the recession. Many manufacturing balances are now at a satisfactory level, but the service sector balances are sluggish.

Balances measuring domestic and export activity across firms showed welcome increases, and more businesses are looking to invest in employing more staff, training, and plant and machinery. However, cashflow is still a real problem, and despite concerns about inflation decreasing, recent increases in oil and food prices may alter this over the next few months.

Domestic orders
- Domestic balances have improved over the last quarter, but remain below pre-recession levels.  Manufacturing and service sector balances for home deliveries and forward-looking orders rose to the strongest levels since Q2 2011.
- Manufacturing home deliveries up 12 points to +12%, and home orders up 19 points to +6%. In the service sector, the home deliveries balance rose eight points to +10% and the home orders balance is up 16 points to +7%.

- Balances recording exporting activity strengthened in Q1 2012. For both manufacturing and service sector firms, the balances returned to Q2 2011 levels.
- Though stronger than domestic orders, exports are still below levels seen in the BCC’s Quarterly Economic Surveys prior to the recession.
- The manufacturing balance for export deliveries rose 12 points, to +24%, and for export orders increased 15 points, to +20%. - The service export deliveries balance rose six points, to +16% and for export orders the balance is up 13 points, to +12%.

- Figures for the last three months showed an increase in the balance of manufacturers and service sector firms expanding their workforce. However, the manufacturing employment balance is stronger (at +16% - the strongest since Q4 2010), than the service sector balance which is still weak at 4% (an increase of two points).
- Firms in both sectors are more optimistic about future recruitment than during Q4 2011. The balance of manufacturing firms looking to increase workforces surged 23 points to +15%, and in the service sector it is up nine points to +11% - both levels last seen in Q2 2011.

Business confidence & investment
- Confidence among businesses has increased on the previous quarter, but remains weak by historical standards, particularly for services. The balance measuring manufacturers’ expectations for increasing turnover and profitably jumped to levels last seen in Q2 2011. And among service sector firms, turnover confidence increased to +30% (last seen in Q2 2011), and profitability confidence rose to 14% (back to levels in Q4 2010).
- More firms are looking to increase investment. Plans by manufacturers to invest in plant and machinery increased to +17% (the strongest level since Q4 2010), and intentions to invest in training increased by seven points to +17% (last seen in Q1 2008). In services, the results were positive but weaker, with the balance measuring investment in plant and machinery up to +5% and in training to +13% - both the strongest levels since Q2 2008.

- Balances measuring cashflow (the movement of cash in an out of a business) remain weak, and in negative territory for services. The manufacturing cashflow balance fell one point, to +1%, still a weak level. The services cashflow balance rose four points, to -4%, and is also very weak.

Commenting on the results, John Longworth, Director General of the BCC (pictured), said: “It’s encouraging to see that businesses are feeling more confident at the start of 2012 than they were at the end of 2011. But that underlines the need to support and foster growth and investment by companies to ensure that the increases we have seen in the first quarter continue. The UK economy is still facing huge challenges and the recovery is much too slow. The UK has the potential to recover, but to achieve that the government has to set businesses free to grow.

"While the government has promised positive changes that will help businesses, improved transport infrastructure and deregulation for example, they are yet to become a reality. These medium- and long-term measures must be brought forward to help businesses grow and create jobs. Access to finance is still a real problem for many firms, and more must be done to mean that this doesn’t threaten recovery. More radical measures, such as a state backed SME lender, should be implemented to address the gap in business funding. We have also called for the scrapping of the swingeing business rate increase of 5.6% this month which will exacerbate cashflow problems for many firms.

“We support the need for the government to persevere with its deficit-cutting plan, but there must be a significant reallocation of spending priorities. There must be a greater focus on policies to support growth that will enable businesses to create jobs, invest, and export. As the public sector’s share of economic activity shrinks over the next few years, forceful measures are needed to make it possible for businesses to drive recovery.”

David Kern, BCC Chief Economist, said: “The results of the Quarterly Economic Survey point to a welcome but modest improvement in the economic situation. The UK economy will likely avoid a recession, though the erratic construction figures may distort the ONS estimate. On the basis of this survey, we are now predicting quarterly GDP growth of 0.3% in Q1 2012, in line with the OBR’s recent forecasts. However, growth is likely to remain low for some time, and a return to a more normal pace is unlikely until 2013.

“Our forecast for 2012 GDP is 0.6%. Our prediction is lower than that of the OBR* for two reasons. Firstly, we are still concerned that the unresolved problems in the eurozone may trigger new upheavals later this year. Secondly, in view of the increases in oil and food prices since January, our current forecast is that the fall in UK inflation over the next 12-18 months will be slower than first expected.

"With domestic demand remaining weak and unemployment likely to increase to approximately 2.9 million over the next year, every effort must be made to boost growth and empower the private sector to create jobs. While the government perseveres with efforts to cut the deficit, it must reallocate priorities, within the spending envelope, towards growth enhancing policies. Red tape must be cut more aggressively, the credit easing programme must be made more effective, and the MPC must do more to ensure that the huge QE programme encourages increased lending to viable SMEs.”

The BCC QES summary and national totals can be read here and here respectively.

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