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UK Recovery Still Uncertain: Chamber of Commerce

The UK economy returned to growth in the first quarter of 2011 but the outlook for the rest of the year remains worrying, according to a report published Tuesday by the British Chambers of Commerce (BCC).

While sales balances for the manufacturing sector remained positive and exports were strong there had been a worsening across all other key balances and overall the BCC called the results of its survey “mediocre and disappointing.”

The survey blamed the increase in value added tax (VAT) and the effect of tough government spending cuts for the disappointing economic outlook, particularly for manufacturing which saw a decline in export sales of 7 percentage points to 30 percent, while orders fell 13 percentage points to 26 percent, although both figures were still relatively high in absolute terms.

Meanwhile, domestic sales remained poor suggesting a “sluggish” market in the UK with businesses more likely to see growth from overseas than at home, the BCC said.

Service sector exports fell by 6 percentage points to 15 percent, but orders rose 4 percentage points to 16 percent, their highest level since the first quarter of 2007. On balance however, manufacturing exports were still stronger than service sector exports.

“The results of the QES 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,” David Frost, Director General of the BCC, said in a statement.

The BCC said it expected gross domestic product had returned to positive territory in the first quarter, but that such growth would only be slightly ahead of the 0.5 percent decline seen in the last quarter of 2010, suggesting that the economy had only just crept back into positive territory.

It added the figures showed manufacturers were much less confident of increasing their expected turnover and profitability in the next 12 months than they had been three months previously.

Confidence has fallen to levels not seen since the middle of 2009, with turnover figures falling 20 percentage points to 28 percent and profitability down 20 percentage points to 10 percent.

Businesses were also still facing real difficulties in managing cashflow with figures suggesting business cashflows had been badly affected by recent shocks such as adverse weather conditions, and the VAT increase.

Cashflow balances worsened significantly over the quarter moving into negative territory. For manufacturing firms, the cashflow balance plunged 18 percentage points while service sector cashflow fell 10 percentage points.

Rising raw material costs over the quarter also meant firms were more likely to raise prices, the report said, although pressure to increase wages remained stable.

The number of manufacturing firms wanting to increase prices rose by one percentage point to 40 percent. But 80 percent of firms said raw material costs were adding to the pressures on them to increase prices.

“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,” Frost added.

Meanwhile, David Kern, Chief Economist at the BCC, called on the Bank of England to keep any decision on interest rates on hold for the time being at least.

"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 worsen risks of a serious setback," he said.

Contact Europe: Economy

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