|‘TWO-TIER’ GROWTH CONTINUES, WITH ALARM BELL FOR TRADE ASPIRATIONS
September 2 2015.
- The BCC's economic survey for Q3 2015 signals moderate economic growth over the next year.
- Overall the results are disappointing as most key balances for both manufacturing and services were down on the previous quarter, although service sector balances dipped only slightly.
- Manufacturing balances are significantly weaker than for services. Notably, the manufacturing export sales balance reached a six year low.
The British Chambers of Commerce (BCC) Quarterly Economic Survey (QES) - Britain's largest and most authoritative private sector business survey, based on almost 7,500 responses from firms, employing around 800,000 people – shows that Britain’s two-tier growth trend continues. While both manufacturing and service balances were generally weaker this quarter, manufacturing balances declined to a much larger extent than in services.
Most key national balances for the service sector dipped slightly on the previous quarter, although the balance for domestic sales recorded a healthy improvement. Overall, service sector balances remain relatively strong, indicating the sector’s overall health is still robust.
Nearly all key national manufacturing balances remained stagnant or fell, painting a picture of prolonged, slow manufacturing growth. Notably, the balance of manufacturing firms exporting their products reached a six year low.
Key findings in the Q3 2015 Quarterly Economic Survey:
- Overall, the results signal moderate economic growth over the next year, but the UK recovery is facing serious global challenges.
- In both manufacturing and services, most key balances were weaker in Q3 than in Q2, even though there were a few improvements.
- Even so, the falls in the Q3 service balances are in general smaller than the declines in the manufacturing balances.
- In absolute terms, most Q3 service balances are stronger than the manufacturing balances.
- Intentions to increase prices fell sharply in manufacturing (+23% in Q2 2015, +8% in Q3 2015) and rose slightly in services (+20% in Q2 2015, +23% in Q3 2015).
- The percentage of firms operating at full capacity increased slightly in both main sectors.
- In services, there were improvements from Q2 to Q3 in the domestic sales balance (increasing from +31% to +36%) and the balance for employment in the previous three months (increasing from +22% to +24%).
- However, all the other key service balances declined slightly between Q2 and Q3. Confidence in profitability went from +45% to +42%, investment in plant & machinery went from +20% to +17% and employment expectations fell from +30% to +24%.
- In manufacturing, the balances for exports, investment, confidence, employment expectations and cashflow recorded falls between Q2 and Q3.
- From Q2 2015 to Q3 2015 export sales fell from +14% to +10%, export orders fell from +15% to +10%, investment in training fell from +26% to +20%, confidence in turnover fell from +51% to +43%, confidence in profitability fell from +45% to +32%, employment growth expectations fell from +27% to +22% and cashflow fell from +11% to +9%.
- The domestic manufacturing balances for sales and orders were both static (+20% and +18% respectively) in Q3 2015, after weakening markedly in Q2 2015.
- The main exception to the pattern of weaker manufacturing balances was a Q3 improvement in the balance of manufacturers who expanded their workforce in the last three months (+20% in Q2 2015, +28% in Q3 2015).
John Longworth, Director General of the British Chambers of Commerce, said: “These latest survey results are somewhat disappointing, as both manufacturing and service firms experienced dampened growth. The real area of concern is manufacturing. Confidence is low, as growth continued to fall, and our measure of manufacturing export growth hit a six year low. Services growth, on the other hand, dipped only slightly and overall trends show the sector remains relatively strong and stable.
“Global uncertainty, weakened demand from China and the strength of the pound are some of the factors likely hindering manufacturers’ performance. If the manufacturing sector has entered a prolonged period of slow growth, then closing the trade deficit and improving the current account deficit will become more difficult.
“If we want to make sure this period of two-tier growth is only temporary then we must help businesses get access to the working and growth capital that they require. We must also deal with the intensifying skills gap, which is holding British businesses back. The Chancellor’s Spending Review is the opportune time to tackle these shortcomings, not only for manufacturers but for all companies. Only action to help fix the fundamentals – skills, infrastructure and access to capital – can help end the UK’s two-tier growth pattern and ensure all businesses can grow.”
David Kern, Chief Economist at the British Chambers of Commerce, said: “The Q3 2015 results point to moderate growth in the UK economy over the next year, driven mostly by services and by domestic demand. Overall, however the results are disappointing. Most key balances, for both manufacturing and services, are weaker in Q3 than in Q2. It is particularly concerning that the exports and confidence balances have weakened in both main sectors. The results suggest that the pace of GDP growth has decelerated slightly in Q3 2015.
“The manufacturing sector is facing major obstacles, while the service sector is more resilient overall. The Q3 falls in the manufacturing balances are in general larger than the declines in the service balances. In absolute terms, the manufacturing balances are weaker overall than the service balances. The exceptionally feeble manufacturing export balances are a stark reminder that rebalancing the economy and promoting exports in services must be national priorities.
“While we must not forget the strengths of the UK economy – after all we have higher growth than in most G7 economies and a dynamic and flexible labour market - the recovery is still fragile. Given the uncertain global situation, it is important to avoid unnecessary risks. The MPC should keep interest rates at their current low levels until well into 2016.”