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Economic recovery still hesitant

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A new survey has suggested that, while the UK economy continues to recover, worrying trends remain.

The latest Quarterly Economic Survey from the British Chambers of Commerce (BCC) has revealed strong growth in the manufacturing sector but a still fragile performance from the service industry.

The poll covered the fourth quarter of 2010 and took in some 5,600 UK firms.

Overall, the survey painted a mixed picture. While the indicators pointed to a strong manufacturing sector, performance in the service sector was weaker, raising concerns about a sustainable recovery.

Although the UK economy continued to expand in the last three months of 2010, the rate of growth slowed compared with the previous quarter because of the inadequate performance of the service sector, the BCC said. Growth was down to between 0.4 per cent and 0.5 per cent.

While manufacturing looks on course to help to rebalance the economy, persistent problems in the Eurozone may yet cause serious difficulties for UK exporters.

The service sector’s weaknesses are worrying, the BCC insisted, and, unless reversed, could have adverse consequences, particularly for jobs.

Despite the still difficult trading conditions, business confidence remained high.

Among manufacturers, turnover confidence held steady near to a three-year high, moving down 1 point to +48 per cent. Profitability confidence increased 7 points, to +30 per cent, the highest level since the final quarter of 2007.

Both measures were also up for services, though they suggest firms in the sector are not as confident as earlier in 2010. The service sector’s turnover confidence balance rose 12 points to +26 per cent. Profitability confidence increased 13 points to +17 per cent.

UK exports continued to do well. In both manufacturing and services, the exporting figures signalled an increase in both overseas sales and orders during the quarter. Manufacturers enjoyed their strongest export levels since 1994, while service sector figures suggested exports returning to levels not seen since before the recession in 2007.

David Frost, the BCC’s director general, counseled caution on the rate and pace of the economic recovery.

Identifying manufacturing as a highlight, Mr Frost pointed to ongoing difficulties in the services sector.

He said: “UK businesses have witnessed some of the toughest years in recent memory. Our latest economic survey points to some encouraging signs amongst UK firms, particularly in manufacturing.

“However, as the figures for the service sector show, we’re not out of the woods yet. Faced with public sector cuts and cost pressures, ensuring the health of UK businesses is critical to a sustained economic recovery.’

Mr Frost backed extra measures to encourage more new start-ups and more employment, and to create stronger companies and to support export potential.

He continued: “While the BCC’s survey points to our economy recovering, we call on the Government to take concerted action now to ensure recovery continues. Only a clear growth strategy set alongside existing plans for deficit reduction, will give businesses the confidence to growth through 2011 and beyond.”

David Kern, chief economist at the BCC, added: “The strength of manufacturing will help to rebalance the economy, but persistent problems in the Eurozone will create difficulties for our exporters. The disappointing performance of the service sector is disturbing, particularly as we are yet to see the full impact of the VAT increase and deficit-cutting measures on these firms.

“Unless reversed, weaknesses in services could have adverse consequences, particularly for jobs. While we expect the private sector to prove sufficiently robust to withstand the impact of the tough deficit reduction programme, the UK recovery is fragile.”

Dismissing the risk of a new recession as “unlikely”, Mr Kern nevertheless urged the Government to act forcefully to support growth, and the Bank of England to persevere with its current expansionary policies and to maintain low interest rates until the recovery is more secure.