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Economy faces worrying future

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The UK economy returned to growth in the first quarter of 2011 but still faces many challenges in a worrying future, a new survey has claimed.

The British Chambers of Commerce’s latest quarterly survey, which covered some 6,000 firms, found that, although growth has returned, the recovery is still fragile.

The BCC said that, following the disruption of the bad weather in December, the economy has moved back to positive growth in the first three months of this year. However, the upturn in is likely to have been only slightly larger than the decline of 0.5 per cent seen in the final quarter of 2010.

Cashflow is still proving a real problem for many firms, the BCC reported, while input prices, especially on raw materials, is squeezing profit margins and is likely to lead to price rises.

David Frost, the BBC’s director general, said: “The results show our economy faces a difficult year and that the recovery will be choppy. Exporting activity remains strong, but there have been sharp declines in confidence, and cashflow is still a real concern for businesses.

“While the Government has listened to calls to help the private sector create growth, there is more to be done in giving businesses greater confidence, and encouraging them to export, invest and create more jobs. As the public sector cuts start to bite, the Government must get the detail right on the measures announced in the Budget to generate economic growth by helping businesses thrive.”

David Kern, chief economist at the BCC, added: “The Q1 QES results highlight the fragility of the UK economy in the early months of 2011, following the increase in VAT and the first wave of the Government’s tough spending cuts. The results are mediocre and disappointing, particularly for manufacturing.

“Since disruptions resulting from the severe weather conditions in December have probably artificially depressed some of the balances in the current survey, we believe the economy has returned to positive growth in Q1 2011. However the upturn in Q1 is likely to have been only slightly larger than the decline recorded in Q4 2010. This means that the level of output this quarter was only marginally higher than in Q3 2010.

“Benefiting from a competitive exchange rate, manufacturing still has the potential to drive the UK recovery. But the international background has become riskier for Britain’s exporters, while the domestic austerity plan will intensify pressures on businesses and consumers. Given the underlying uncertainties, the MPC must avoid premature interest rate increases that may worsen risks of a serious setback.”