The British Chambers of Commerce Q1 2007 Quarterly Economic Survey of 4,700 businesses appears to indicate that the cumulative impact of the three recent Interest Rate increases has significantly dampened the pace of economic growth and the pressure to raise prices.

The Q1 2007 balances show distinct declines for both the Service and Manufacturing sectors, signalling a clear weakening in the pace of activity.

The manufacturing sector recorded weaker balances for home sales & orders, employment and employment expectations, investment and cashflow.

The service sector’s Q1 balances weakened for home sales & orders, export sales & orders, employment, confidence and cashflow.

Critically, in comparison to the 2006 Q4, the Q1 results show that pressures to raise prices were markedly down, in both manufacturing and services. Clearly businesses are taking a more modest and realistic view about their pricing power.

David Kern, Economic Adviser to the British Chambers of Commerce, said:

“The cumulative impact of the three Interest Rate increases announced since August 2006 have inevitably dampened significantly the pace of economic growth. The results of this survey strongly indicate that the MPC should resist the recent clamour to raise interest rates and set to one side the exaggerated perceptions of growing business pricing power.

“We do acknowledge that inflation is still a potential danger, but there are powerful arguments suggesting that demand pressures will slow, and inflation will decelerate, without additional tightening. With average earnings growth below RPI inflation, UK disposable incomes are being squeezed and spending will inevitably decelerate. Moreover, the recent rise in sterling is exerting a dampening effect on economic activity and inflation.

“Given the underlying uncertainties, there are powerful arguments for the MPC to wait before raising rates, so as to avoid damaging the economy unnecessarily. An increase in interest rates at this time would pose new and unpredictable threats for British business. The Budget increase in the Small Companies’ Rate is a blow to confidence, and the harmful effects of recent interest rate increases are not yet fully felt. A marked slowdown in activity is highly likely even if Bank rate stays at its current level. But higher interest rates would entail major additional risks. It is particularly important to avoid damaging monetary overkill.”

The key findings of the Q1 2007 British Chambers of Commerce are

The Domestic Market
The manufacturing sector’s domestic balances weakened in Q1. The net balance for home sales fell to +26% in Q1, from +31% in Q4. The net balance for home orders fell to +23% in Q1, from +27% in Q4. While lower than in Q4 2006, both Q1 2007 domestic balances were still strong by historical standards.

The service sector’s domestic balances also fell in Q1. The net balance for home sales fell 7 points in Q1, to 27%, in line with the 2006 average levels. The net balance for home orders fell 2 points in Q1, to +28%. The Q1 service sector’s domestic balances remained stronger than the manufacturing balances. But the gap was narrow.

Export Market
The manufacturing sector’s export balances remained almost unchanged in Q1. The export sales balance rose 1 point, to +21%. The export orders balance fell 1 point to +20%. The service sector’s export balances worsened in Q1, but performance was still adequate. The balance for export sales fell 2 points to +25%. The balance for export orders fell 6 points to +19%.

Employment
The manufacturing employment balance fell 8 points in Q1, to +9%. The employment expectations balance fell 1 point to +11%. In the service sector, the Q1 employment balance fell 3 points to +14%. But the Q1 employment expectations balance rose 6 points to +28%

Investment
The balance of manufacturing firms planning to increase investment in plant and machinery fell 5 points in Q1, to +18%. Intentions to invest in training fell 7 points to +15%. In services, there were increases. The Q1 balance of firms planning to increase investment in plant and machinery rose 2 points to +20%. The balance for intentions to invest in training rose 6 points to +32%.

Business Confidence
The manufacturing sector’s turnover confidence balance rose 4 points in Q1, to +53%, high by historical standards. Manufacturing profitability turnover confidence increased 3 points in Q1, to +40%, also historically high. The service sector’s confidence balances fell in Q1, but were still relatively strong. Turnover confidence fell 2 points, to +56%. Service profitability confidence fell 1 point in Q1, to +44%.

Capacity Utilisation & Cashflow
The proportion of manufacturing firms operating at full capacity rose 5 points in Q1, to +41%. In services, 42% of firms worked at full capacity in Q1, up 2 points. Manufacturing cashflow fell 7 points in Q1 to +11%. Services cashflow fell 3 points in Q1 to +15%.

Prices
The balance of manufacturing firms reporting pressure to raise prices fell 16 points in Q1, to +23%, an unusually large decline. In services, the balance of firms expecting to raise prices fell 6 points in Q1, to +30%.

Economic Climate
The Q1 results signal a clear weakening in the pace of activity in most areas, when compared with the high levels recorded in Q4. The manufacturing sector recorded weaker balances for home sales & orders, employment & employment expectations, investment, and cashflow; the export balances were almost unchanged. There was a welcome improvement in manufacturing confidence; but the declining Q1 trends in most other key balances are very disturbing. The service sector’s Q1 balances weakened for home sales & orders, export sales & orders, employment, confidence, and cashflow. Though the investment and employment expectations balances improved, the service sector recorded a worrying deterioration in performance in most other key areas. Pressures to raise prices were markedly down in Q1, in both manufacturing and services. Businesses are taking a more modest and realistic view about their pricing power. This is important, because the clamour for higher interest rates is due to exaggerated perceptions of companies’ pricing power. The Q1 results, though adequate overall, signal disturbing worsening trends. The Budget increase in the Small Companies’ Rate is a blow to confidence, and the damaging effects of recent interest rate increases are not yet fully felt. A marked slowdown in activity is highly likely even if Bank rate stays at its current level. But higher interest rates would entail major additional risks.