Threat of double-dip recession fades

The UK economy seems to have sidestepped the dangers of a double-dip recession but still faces many risks, a new study has claimed.

According to the British Chambers of Commerce's latest quarterly survey, the economic upturn is on course.

On the downside, however, the survey also found that business investment is declining, while job losses in the manufacturing sector continue to climb.

The survey, which took in some 5,000 British firms, revealed that the service sector, which comprises the largest segment of the economy, enjoyed an improvement in both domestic and overseas sales during the first quarter of the year.

Manufacturers, though, experienced stagnation, with sales barely positive and orders still negative. Employment over the last three months in manufacturing recorded a large fall, from +3 in the fourth quarter of 2009 to -16 in the first quarter of 2010.

Worringly, investment in plant and machinery, and cash flow are still negative across both sectors, the BCC said.

David Frost, the BCC's director general, described the results as mixed but containing some positive features, such as the service sector's improvement and the relatively strong export balances for manufacturers.

Mr Frost said: "Businesses are showing resilience despite difficult and uncertain trading conditions. Confidence is building, and the government must nurture this with well-thought out policies that support business growth and job creation.

"Special attention must be paid to bolstering our exports in goods and services, which will help rebalance the economy away from an over-reliance on debt and the public sector."

Mr Frost urged the post-election government to avoid additional business taxes that could stifle recovery, arguing that the 1 per cent hike in employers' National Insurance Contributions, planned for 2011, should be scrapped and replaced by a 1 per cent rise in VAT.

The BCC also wants to see a three-year moratorium on any new employment legislation.

David Kern, the BCC's chief economist, added: "These results support the view that GDP growth stayed positive in Q1, but the recovery is set to remain fragile and sluggish. While the upturn in the service sector is gradually gathering momentum, the manufacturing sector is still struggling to enter the recovery phase."

Mr Kern highlighted the deterioration of investment levels in plant and machinery as a cause for concern, saying that, unless the sharp declines in capital investment are reversed, the UK's productivity will fall further and the economy will lack the capacity to meet growing demand when the recovery gains momentum.

Negative cash flow balances suggest many businesses are still facing serious financial pressures, which are due more to lack of demand rather than to reluctance on the part of the banks to lend.

Mr Kern concluded: "Whatever the outcome of the election, a new government must produce a more credible medium-term plan for cutting the country's huge Budget deficit and reducing spending. This will strengthen Britain's credit rating, make it easier for the Bank of England to keep interest rates low for a prolonged period, and underpin the recovery."