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UK economy stabilises in Q2 following surge Q1, finds survey

The results, made up of responses from 7,000 UK businesses, show that the economy is still strong and moving in the right direction, with many key balances higher than they were before the recession. Many of the balances for manufacturing and services are slightly down on the quarter, but this is following the unexpected surge seen in the first quarter of the year.

BCC Director General, John Longworth, says moderate declines of the pace of growth are & lsquo;unsurprising’ given that the economy & lsquo;jolted forward’ in the first quarter of the year. He applauds UK businesses for their continued & lsquo;dedication, confidence and resilience’ but urges the Bank of England not to act prematurely on raising interest rates as this could & lsquo;limit the growth ambitions among the very firms we are counting on to drive the recovery’.

Key findings in the Q2 2014 Quarterly Economic Survey:

&middot         In manufacturing, three balances were at their all-time highs in Q2 2014: domestic sales (42%), profitability confidence (51%) and capacity utilisation (46%), showing that the manufacturing sector is continuing to strengthen – but this compares with six manufacturing balances at their all-time highs in Q1.

&middot         In services, there were no balances at their all-time highs in Q2, compared with two service balances at their all-time highs in Q1 (export sales and orders).

&middot         All the export and investment balances fell in Q2, for both manufacturing and services.

&middot         Despite these falls, Q2 export balances and most investment balances are still above their average 2007 pre-recession levels.

&middot         Concerns around interest rate rises were higher in Q2 than in Q1: 18% of manufacturing businesses expressed concern about interest rate increases in Q2 compared with 16% in Q1, and the figure among service sector businesses rose to 22% compared with 18% last quarter.

&middot         In both manufacturing and services, cashflow balances improved in Q2 (services up two points to 17% and manufacturing up four points to 17%).

&middot         The survey results show that for both manufacturing and services intentions to raise prices eased (services down ten points to 19% and manufacturing down seven points to 17%), and wage pressures weakened (services down five points to 18% and manufacturing down six points to 22%).

Commenting on the results, John Longworth, director general of the BCC, said, “These are strong results that show the recovery is moving forward. Our members continue to do themselves proud by showing dedication, confidence and resilience. While we never like to report even modest declines in our investment and export balances, these are unsurprising, as the economy jolted forward last quarter and has now settled into a period of more stable growth. But we must still aim higher – great, long-term sustainable growth must be our ambition, and we should not settle for second best.

“Repairing our broken business finance system, which constrains access to credit for businesses with the potential to grow, must be a top priority. This will help to provide the building blocks for companies who can then look to take on additional staff, invest and grow.

“These results reinforce the case against the Bank of England making any hasty decisions on raising interest rates in the very short-term. By driving up the cost of credit for fast-growing firms, many of whom do not sit on the same healthy cash piles as their more established counterparts, early rate rises may mean more limited growth ambitions among the very firms we are counting on to drive the recovery. We must nurture the business confidence we are seeing at present by giving firms the security of working in a low interest rate environment for the foreseeable future – with eventual rises both moderate and predictable.

“As we enter a period of heightened political uncertainty, it is even more important to maintain a healthy and sustainable economic recovery. At this crucial stage of the economic cycle, the UK cannot afford populist decision-making that undermines strategic long-term decisionsas this could jeopardise our national success in the years to come.”

David Kern, Chief Economist at the BCC, said, “Although most key balances for Q2 are lower than the very strong figures seen in the first quarter, they remain high by historical standards. In our recent economic forecast, we predicted that quarterly GDP growth for Q2 would be 0.8%, with full-year growth of 3.1%. However, these results mean that risks of a downgrade have increased.

“The Q2 falls in all the export and investment balances act as a timely warning that although growth is stable, challenges facing our economic recovery still remain. Rises in sterling are making UK exports more expensive. Uncertainties around early interest rate increases are adding to the difficulties, and our excessively large current account deficit poses potential risks. UK growth cannot permanently rely on rising consumer spending, which is driven by a buoyant housing market, and on excessive household debt. Unless investment and net exports make bigger contributions to growth, the recovery could stall.

“Both the government and the MPC must make every effort to stimulate enterprise and wealth creation. On its part, the MPC must restore clarity to its forward guidance and reassure business that from next year they will face only gradual rather than sudden change. With inflation well below target and earnings still rising by less than one per cent per year, the risks to the recovery from raising rates prematurely are much greater than the risks of waiting a little longer.”

 

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