The British Chambers of Commerce (BCC) Quarterly Economic Survey – Britain’s largest and most authoritative private sector business survey, based on almost 7,500 responses from firms – shows that most key manufacturing and services balances were weaker this quarter, but manufacturing firms fared far worse. This has led Britain’s two-tier growth trend to become further entrenched.
Most key balances for the services sector dipped slightly again on the previous quarter, with domestic sales continuing to be the main contributor to overall growth. The sector however continues to remain resilient in the face of global headwinds.
However the manufacturing sector continues to struggle. Domestic and export sales and order balances have now fallen well below their pre-recession levels in 2007, suggesting that the sector is close to stagnation. Firms are looking to increase prices markedly in the next 12 months, but are also thinking about investing more in plant and machinery, suggesting that the sector is keen to make the most of low inflation and low interest rates to improve productivity.
Key findings in the Q4 2015 Quarterly Economic Survey:
- Overall, the results suggest positive economic growth over the next year, albeit at a slower pace, but built mainly off the back of the services sector. The UK recovery continues to face many global challenges
- Most key balances were weaker in Q4 than in Q3 for both the manufacturing and services sectors; the falls in services are in general smaller than the declines in manufacturing
- Export manufacturing balances declined sharply to levels approaching stagnation – export sales declined nine points to +1%, the lowest level since Q3 2009 – while export orders also fell to +1%
- The services sector export sales balance also fell by three points to +15% - the lowest level since 2011
- Domestic balances were stronger than export balances, despite falling. Manufacturing sales balance fell seven points to +13%, while domestic orders were down eight points to +10%. In services, domestic sales balance fell four points to +32%, with orders dropping six points to +23%
- Intentions to increase prices rose markedly in manufacturing, from +8% in Q3 to +19% in Q4. In services however, this fell slightly to +21%
- Both sectors report increased pressures for higher pay settlements
- On a positive note, both sectors report increased intentions to invest in plant and machinery. Manufacturing rose six points to +24%, while the balance for services rose three points to +20%
John Longworth, Director General of the British Chambers of Commerce, said:
“While these latest figures demonstrate growth, it is clear that there are warning signs of potential trouble ahead. The declines across the board should send a message to government that UK firms are in desperate need of a favourable business environment, not more administrative burdens.
“It is not enough to rely upon consumer spending and the housing market to grow the economy, nor to rely purely on services to drive export growth. We need a rebalanced economy if we are to continue punching above our weight on the global stage. The quality and variety of our goods and services is what gives Brand Britain its strength overseas.
“The vast windfall from the OBR in the Autumn Statement led to revised forecasts based on improving tax receipts. However businesses can’t focus on growing amid a storm of red tape and tax compliance burdens. In addition, government policy has created overwhelming pressure to increase pay settlements, despite downward pressure on wages created by continued migration to the UK. Businesses are finding themselves chafed and stagnating.
“The real concern is that this period of two-tier growth becomes the norm rather than a blip. This requires the government to make 2016 a year of action, on infrastructure, skills, and access to non-equity finance for firms. Otherwise the UK economy could suffer negative consequences in the face of increasing global uncertainty.”
David Kern, Chief Economist at the British Chambers of Commerce, added:
“Coming after relatively weak figures in our Q3 survey, the falling balances in Q4 highlight the risk that the pace of growth may slow further. The results also underscore the serious obstacles that the UK will face when trying to rebalance the economy towards net exports. While worsening global circumstances are the main impediment, we are not doing enough closer to home to encourage businesses to trade overseas.
“The sharp decline in export manufacturing balances, to levels approaching stagnation, is particularly disturbing. Slowing growth in international markets is causing these firms to become pessimistic about their short-term prospects.
“Though our vibrant and resilient services sector will remain the main UK growth driver, the Q4 results indicate that it is also losing some of its momentum. But the challenges facing manufacturing are much more serious.
“While we must not forget the strengths of the UK economy - with higher growth than in most G7 economies and with a dynamic and flexible labour market - the recovery is still fragile. Given the global uncertainties, it is important to avoid unnecessary risks. Though wage pressures are rising, inflation is likely to remain below target over the next 18 months, and the MPC should keep interest rates at their current low levels for the time being.”