Economic recovery still on track

7 April 2010

The UK economic recovery remains on track despite weaker data emerging last month from the dominant service sector.

The British Chambers of Commerce (BCC) says the UK is on course to avoid a double-dip recession with first quarter figures boosted by higher activity levels within the service sector. 

The BCC, which polled more than 5,500 businesses, found that both sales and orders had risen for the first three months of the year.

Economists have also dismissed March’s dip in the purchasing managers’ Index - from 58.4 in February to 56.5 last month - as a blip which will not affect the UK’s growth prospects.

Howard Archer, chief UK economist at IHS Global Insight, says services activity in February has lifted and made up for some of January's weather-related business losses.

“The business activity index was still well into expansion territory," he adds. "Furthermore, other elements of the [BCC] survey bode relatively well for services activity, in the near term at least, with incoming new business seeing pretty solid growth, business expectations climbing to a near three-year high and employment in the sector edging up for the first time since April 2008.”

Economists are now predicting that ecomomic growth in the first quarter of 2010 could be around the 0.4% level, equal to the growth achieved in the final quarter of 2010. However, they warn that the 0.7% month-on-month drop in services output in January means there is a lot of uncertainty surrounding the outcome.

Despite such optimism, the BCC warns that the recovery remains fragile with serious risks of a setback still remaining.

David Kern, chief economist at the BCC, explains: “These results support the view that economic growth stayed positive in the first quarter, but the recovery is set to remain fragile and sluggish.”
For example, the manufacturing sector continues to struggle with orders for the first three months of the year little higher than in the previous quarter.

Just over one-in-five firms say exports levels have grown during the period compared with 17% in the fourth quarter of 2009.
However, last week’s purchasing managers’ index found that activity levels within the sector grew at their fastest pace for 15 years in March.

Vicky Redwood, senior UK economist at Capital Economics, believes the outlook remains fairly positive.

“A weighted average of all three CIPS surveys is still, on the face of it, consistent with quarterly economic growth of between 0.5% and 1%,” she says.

“It therefore looks like the economy could have posted a fairly decent expansion in the first quarter – although it may struggle to make further progress.”

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