Largest independent business survey shows recovery is still tentative

Commenting on the BCC's Q2 Quarterly Economic Survey (QES), BCC Director General David Frost, said:

"Today's figures show worrying falls in export balances but business confidence experienced a welcome - albeit tentative - upturn. It is clear from the survey that the MPC was right to hold rates at 4.5pc and we urge it to reject calls for early increases. Against the worrying background of falling export balances in the new QES, the proposed cuts in the Overseas Trade Promotion Budget could cause serious damage and the policy should be urgently reconsidered."

"For its part the Government must carry out its promise to reduce the oppressive regulatory burden and make it clear that additional tax increases on business will not be contemplated."

UK manufacturers recorded stronger balances for confidence, cashflow, home orders, employment and plant and machinery investment. However balances for export sales and orders, home sales and employment expectations all fell. Mr. Frost said: "The manufacturing upturn is very fragile and follows a period of weak confidence and falling output."

In services Q2 performance improved in many areas, but there is cause for concern on a number of important measures. Service balances for home sales and orders, confidence, employment, cashflow, and plant and machinery investment all rose during the quarter. But there were marked declines in export sales and orders whilst employment expectations worsened.

Q2 QES Summary

Introduction

The Q2 2006 results are mixed. The main features are worrying falls in all the export balances, and a welcome but vulnerable improvement in confidence. The manufacturing sector recorded stronger balances for confidence, cashflow, home orders, employment and plant and machinery investment. But the sector recorded falling Q2 balances for export sales and orders, home sales and employment expectations. The manufacturing upturn is very fragile and follows a period of weak confidence and falling output. The service sector's Q2 performance improved in many areas, but a few features are worrying and disappointing. Service balances for home sales and orders, confidence, employment, cashflow and plant and machinery investment all rose in Q2. But there were marked Q2 declines in the service balances for export sales and orders and employment expectations worsened.

The domestic market

The manufacturing sector's domestic balances recorded small diverse movements in Q2. The net balance for home sales fell two points to +13pc, the same as in Q4 2005 and lower than in the seven quarters to Q2 2005. The Q2 balance for home orders rose one point to +14pc, highest since Q2 2005 but lower than in three out of the four quarters of 2004.

The service sector's domestic balances strengthened in Q2. The net balance for home sales rose six points to +28pc. The balance for home orders rose two points to +20pc. Both Q2 service sector domestic balances were highest since Q4 2004, but still lower than in the five quarters to Q4 2004.

The export market

The manufacturing sector's export balances worsened in Q2. The export sales net balance fell four points to +19pc. The export orders balance fell seven points to +15pc. Both Q2 manufacturing export balances were higher than in the final three quarters of 2005 but lower than in Q4 2004 and Q1 2005. The service sector's export performance worsened markedly in Q2. The net balance for export sales fell seven points to +22pc, still relatively high. The service balance for export orders plummeted 14 points in Q2, to +12pc.

Employment

The manufacturing employment Q2 balance rose to +3pc in Q2 from +2pc in Q1, still a low level. The employment expectations balance fell to +9pc from +12pc. In the service sector, the Q2 employment balance rose six points to +18pc, highest since Q4 2004. The Q2 employment expectations balance fell three points to +24pc, still an adequate level.

Investment

The balance of manufacturing firms planning to increase investment in plant and machinery rose one point in Q2 to +16pc, highest equal since Q3 2004. Intentions to invest in training fell four points to +14pc. In services, the Q2 balance of firms planning to increase investment in plant and machinery rose one point to +16pc, highest since Q3 2004. The balance for intentions to invest in training fell four points to +22pc.

Business Confidence

The manufacturing sector's turnover confidence balance rose six points in Q2 to +49pc, highest since Q4 2004. Manufacturing profitability confidence rose 19 points to +40pc, highest since Q4 1999. The service sector's turnover confidence balance rose three points in Q2, to +54pc, highest equal since Q4 2004. Service profitability confidence rose one point to +34pc, highest since Q1 2005

Capacity utilisation

The proportion of manufacturing firms operating at full capacity rose one point in Q2 to +39pc. In services, 37pc of firms worked at full capacity in Q2, up one point.

Cashflow and prices

Manufacturing cashflow rose seven points in Q2 to +7pc. Services Q2 cashflow rose six points to +13pc. The balance of manufacturing firms reporting pressure to raise prices fell one point in Q2 to +21pc. In services, the balance of firms expecting to raise prices fell 12 points in Q2 to +15pc.

Economic climate

The Q2 2006 results support our assessment that the UK recovery is still very tentative. The new QES highlights worrying falls in all the export balances and a welcome but vulnerable upturn in confidence. The manufacturing sector recorded improved balances for confidence, cashflow, home orders, employment, and plant and machinery investment. But the sector's Q2 balances worsened for export sales and orders, home sales and employment expectations. The manufacturing recovery is very fragile and follows a period of weak confidence and falling output. The service sector's Q2 performance improved in many areas, but some features are worrying and disappointing. Service balances for home sales and orders, confidence, cashflow, employment and plant and machinery investment all rose in Q2. But there were marked Q2 declines in service export balances and employment expectations worsened.