UK’s largest and most representative economic survey signals cautious optimism.

Releasing its Q3 Quarterly Economic Survey, (QES) the British Chambers of Commerce said that whilst there are positive elements in the UK economic climate, many concerns still persist.

Commenting on the survey Sally Low, Director of Director of Policy & External Affairs, said: "Today’s positive results should not be seen as an excuse for complacency or for damaging increases in interest rates.”

“Businesses are steeling themselves for a possible rise in rates later this year. But to minimise the damage to the economy and particularly to manufacturing, it is vital that the MPC ensures that, unlike in August, an increase in rates does not come as a shock.

“The MPC must make it clear that, if a rise in rates is necessary, and such a move is not inevitable, five per cent should be seen as the absolute ceiling, and further interest rate increases are very definitely not on the cards.

“The UK upturn is still fragile. UK businesses face oppressive regulatory burdens, and concerns over future tax increases threaten confidence. To nurture the fragile recovery, we need a business-friendly economic policy ”

David Kern, the BCC’s Economic Adviser, noted that: “Net balances for exports, employment and investment are up across the board. But the domestic and confidence balances are mixed.

“Pressures to increase prices are much stronger, pay settlements are up and capacity utilization is increasing. These pressures are disturbing, because they may add to the clamour for higher interest rates, at a time when global risks are worsening, with growth set to slow next year in both the US and the Eurozone. ”

The manufacturing sector recorded stronger balances for home sales and orders, export sales and orders, employment and employment expectations, cashflow, and investment in plant and machinery. But manufacturing confidence balances weakened overall, with a large fall in profitability confidence.

The service sector’s Q3 balances improved for export sales and orders, employment and employment expectations, cashflow, investment in plant and machinery, and both confidence balances. But the service sector’s home balances worsened overall, with a fall in home sales only partially offset by a marginal increase in home orders.

Mr Kern concluded: “Stronger Q3 balances for exports, employment and investment indicate that growth has been satisfactory but the sharp falls in the manufacturing sector’s profitability confidence balance and the overall weakening in the service sector’s domestic balances are worrying.”

“This survey indicates strong pressures to increase prices in both manufacturing and services partly due to higher wages. The Q3 results also show higher rates of capacity utilisation and combined these pressures are worrying because they potentially add pressure to raise interest rates at a time when global risks are worsening.”

Q3 QES Summary

Introduction

The Q3 2006 results are mostly positive, but there are worrying features. The net balances for exports, employment and investment are up across the board. But the domestic and confidence balances are mixed. Pressures to increase prices are much stronger, pay settlements are up, and capacity utilization is increasing. The manufacturing sector recorded stronger balances for home sales & orders, export sales & orders, employment & employment expectations, cashflow, and investment in plant & machinery. But the manufacturing confidence balances weakened overall, with a large fall in profitability confidence. The service sector’s Q3 balances improved for export sales & orders, employment & employment expectations, cashflow, investment in plant & machinery, and both confidence balances. But the service sector’s home balances worsened overall, with a fall in home sales only partially offset by a marginal increase in home orders.

The domestic market

The manufacturing sector’s domestic balances strengthened in Q3. The net balance for home sales rose to +18pc in Q3, from +13pc in Q2, highest since Q2 2005. The net balance for manufacturing home orders improved to +18pc in Q3, from +14pc in Q2, the same as in Q2 2005, and highest equal since Q4 1999.

The service sector’s domestic balances were mixed in Q3, but there was a slight overall weakening. The net balance for home sales fell 4 points in Q3, to 24pc. The net balance for home orders rose 1 point in Q3, to +21pc, the same as in Q4 2004 and highest equal since Q3 2004. The service sector’s domestic balances remain stronger than the manufacturing balances, but the gap in favour of services has narrowed.

Export market

The manufacturing sector’s export balances strengthened markedly in Q3. The export sales balance rose 15 points to +34pc, highest since Q2 1995. The Q3 export orders balance rose 13 points to +28pc, the same as in Q4 1995 and highest equal since Q2 1995. The service sector’s export balances also improved in Q3, and were high by historical standards. The balance for export sales increased 3 points to +25pc. The balance for export orders increased 9 points to +21pc.

Employment

The manufacturing employment balance rose 14 points in Q3 to +17pc, highest since Q3 2004. The Q3 employment expectations balance rose 2 points to +11pc. In the service sector, the Q3 employment balance rose 6 points to +24pc, highest equal since Q4 1997. The Q3 employment expectations balance rose 6 points to +30pc, highest equal since Q2 2000.

Investment

The balance of manufacturing firms planning to increase investment in plant and machinery rose 6 points in Q3 to +22pc, highest since Q4 1997. Intentions to invest in training rose 9 points to +23pc. In services, the Q2 balance of firms planning to increase investment in plant and machinery rose 6 point to +22pc, highest since Q4 2000. The balance for intentions to invest in training rose 7 points to +29pc.

Business Confidence

The manufacturing sector’s turnover confidence balance was +49pc in Q3, the same as in Q2. Manufacturing profitability confidence fell markedly in Q3 to +30pc, from +40pc in Q2. The service sector’s turnover confidence balance rose 4 points in Q3, to +58pc, highest equal since Q4 1997. Service profitability confidence rose 13 points in Q3 to +47pc, highest equal since Q1 2004.

Capacity Utilisation

The proportion of manufacturing firms operating at full capacity rose 2 points in Q3 to +41pc. In services, 42pc of firms worked at full capacity in Q3, up 5 points.

Cashflow and Prices

Manufacturing cashflow rose 1 point in Q3 to +8pc. Services cashflow rose 4 points to +17pc. The balance of manufacturing firms reporting pressure to raise prices increased 11 points in Q3 to +32pc, highest since figures are collected in Q2 1997. In services, the balance of firms expecting to raise prices rose 13 points in Q3 to +28pc, highest equal since Q1 2005.

Economic Climate

The Q3 results highlight positive features in the economic climate. But there are worrying aspects. Stronger Q3 balances for exports, employment, and investment indicate that growth has been satisfactory. But the sharp falls in the manufacturing sector’s profitability confidence balance, and the overall weakening in the service sector’s domestic balances, are worrying. The welcome improvement in export balances is partly due to the upturn in the Eurozone. But Eurozone growth is likely to weaken. There are also concerns that the US economy is set to slow sharply, and this will have adverse global effects. Our Q3 survey indicates strong pressures to increase prices, in both manufacturing and services, partly due to higher wages. The Q3 results also show higher rates of capacity utilisation. These pressures are disturbing, because they may add to the clamour for higher interest rates, at a time when global risks are worsening. The UK upturn is still fragile. UK businesses face oppressive regulatory burdens, and concerns over future tax increases threaten confidence.