Economic activity increased in Q1 2012

Cashflow remains a major concern.

Lord Mandelson at the BCC annual conference in 2010. Credit: Getty Images

Indicators of domestic and export activity increased in the UK during the first quarter of 2012, according to the British Chambers of Commerce’s new quarterly economic survey of 7,981 businesses across the country.

While more businesses are looking to invest in staff, training, and capital expenditure, growth of UK businesses is still slow. Service sector balances remain sluggish, although many manufacturing balances are now at a satisfactory level.

Domestic orders

Compared to previous quarter, domestic balances have improved but remain below pre-recession levels. During the first quarter, manufacturing home deliveries increased 12 points to 12 per cent, and home orders were up 19 points to 6 per cent.

Service sector home deliveries balance also increased 8 points to 10 per cent and the home orders balance increased to 16 points to 7 per cent.

Exports

The manufacturing balance for export deliveries rose 12 points to 24 per cent, and for export orders increased 15 points to 20 per cent. The service export deliveries balance increased 6 points to 16 per cent and for export orders the balance increased 13 points to 12 per cent.

Employment

The first quarter figures showed an increase in the balance of manufacturers and service sector firms expanding their workforce. However, the manufacturing employment balance is stronger than the service sector balance.

Business confidence and investment

Compared to previous quarter, confidence among businesses has increased this quarter, but remains weak by historical standards, particularly for services.

The proportion of manufacturers planning to invest in plant and machinery increased to 17 per cent, and those intending to invest in training increased by seven points to 17 per cent. In services, investment intentions were up to 5 per cent for plants and machinery, and in training to 13 per cent.

John Longworth, director general of the BCC, 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.

 

Cashflow

The manufacturing cashflow balance declined one point, to 1 per cent, still a weak level. The services cashflow balance increased four points, but is still very weak at  -4 per cent.

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, said BCC.

David Kern, chief economist at BCC, said:

The results of the QES 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 per cent. 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.