UK economy grows strongly in Q2: survey

But a clampdown on govt spending may plunge it back into recession, it warns

(LONDON) Britain's services sector enjoyed its strongest growth for two years over the past three months and manufacturing grew strongly, but tougher times may be ahead as firms are gloomier about the future, a survey suggested yesterday.

The British Chambers of Commerce's Quarterly Economic Survey showed the private-sector recovery gathering pace. The business lobby's chief economist, David Kern, said the survey pointed to economic growth of 0.6-0.7 per cent in the second quarter, around double the rate earlier this year.

However, he warned that this growth was unlikely to be sustained, as an impending clampdown on government spending risked plunging the economy back into recession.

'Although we're champions of manufacturing, it's a worry for the whole economy that services are not strong,' he said, pointing out that private-sector services activity was still half its long-run average, despite the recent pick-up.

'We now have in place very tight fiscal policy for the next few years. We think it's necessary, but this means the risk of a double-dip recession is greater and makes it more necessary for the Bank of England to keep interest rates low.'

The new Conservative- Liberal Democrat coalition is planning spending cuts of around 25 per cent across government departments to slash a deficit running close to 11 per cent of economic output.

'This year we won't see much impact from the fiscal tightening because the stock cycle is strong and earlier fiscal stimulus is still in place,' Mr Kern said. 'But I think the biggest impact on the economy and jobs will come late this year and next year.'

The domestic sales balance for the services sector rose to +12 from +6 in the first quarter, the highest reading since Q1 2008, and the orders balance rose two points over the quarter to +5, also a two-year high.

The manufacturing balances showed a much bigger improvement. The home sales balance shot up to +30 from +1 and orders surged to +19 from -3, both the highest since 2007.

The survey also showed that the long-awaited boost to exports from a past fall in sterling seemed to have materialised, with the manufacturing export sales balance at its highest in almost four years.

However, manufacturers also reported a surge in price pressures, with a balance of +30 in Q2 compared with +8 in Q1, the highest since Q3 2008. The BCC said 80 per cent of firms reported that they were under pressure to raise prices.

That was mainly due to higher raw materials costs, rather than wage costs, and should therefore be less worrying for the Bank of England, as its policymakers largely discount one-off rises in the cost of raw materials when they consider whether to raise interest rates.

'It's critical at this point of the cycle to keep rates as low as possible for as long as possible,' Mr Kern said. 'Fiscal policy will inevitably increase the deflationary factors in the economy.'

The central bank is widely expected to keep borrowing costs at 0.5 per cent when its meeting concludes tomorrow, although one member, Andrew Sentance, voted for a quarter- point hike last month.

'Clearly at a time when a higher fiscal contraction policy is imminent, to hike rates is the wrong thing to do,' Mr Kern said. -- Reuters

Source: Business Times, 7 Jul 2010