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Worst of recession over but recovery will be tough

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The economy may be emerging from the depths of the recession but firms will still encounter difficulties on the road to recovery, the British Chambers of Commerce (BCC) has said.

According to the BCC’s latest quarterly economic survey, which took in 5,600 businesses, both the manufacturing and service sectors showed signs of improvement in the months from April to June.

However, the BCC also pointed out that many of the key business indicators used to measure the state of the economy, such as exports, output and employment, were still very weak.

The most encouraging sign, the BCC said, was that turnover confidence during the second quarter of the year climbed to its first positive reading since the third quarter of 2008.

Among manufacturing firms the rise in confidence increased from -38 in the first quarter to 2 in the second. But this was set against bad news on cashflow which was marooned at -32, the lowest since records began.

The survey revealed that recruitment intentions among firms, though recuperating, were also at a 20-year low, prompting the BCC to keep with its forecast of unemployment running at 3.2 million by the middle of next year.

The BCC used the figures to warn that, without a continued focus on limiting the impact of recession, the economy could drop-off suddenly, shifting towards a W-shaped recession.

David Frost, the BCC’s director general, said: “Our economy is based on confidence, and wealth-creating businesses need to know they will be given the freedom and flexibility to drive the UK out of recession and into a sustainable recovery.”

Mr Frost argued that the government needs to think long and hard about its policies on taxation and red tape, which threaten to stifle growth and employment, adding that the planned increase in National Insurance contributions is a tax on jobs and should be abandoned.

He said: “Signs of improvement in the economy cannot be an excuse for the government to start increasing business tax as a remedy for the ill health of the nation’s finances. Risking any fragile gains would be a huge mistake.”

David Kern, chief economist at the BCC, commented: “The worst phase of the recession is over, but serious downward pressures persist across all sectors and regions. Recovery is now possible but it is not yet secure.”

Further corrective measures are still needed to support the economy, he continued.

“With cashflow, capacity utilisation, and price pressures remaining weak, it is important that the short-term policy stance stays expansionary,” Mr Kern said. “Quantitative easing should be pursued aggressively.”

But he also maintained that sustaining any future recovery and preserving Britain’s international credit rating depend on adopting a credible medium-term strategy for improving public finances.