Building industry shows first signs of life after two years in doldrums

Published 07th Apr 2010

The threat of a double-dip recession has receded slightly, with new figures suggesting that the economy grew in the first three months of the year.

Recovery in the dominant services sector gained momentum between January and March, despite January’s dismal weather and the VAT rise, according to a survey by the British Chambers of Commerce.

Separate data showed that activity in the construction sector picked up last month for the first time in two years.

The BCC is still concerned that the economy faces significant headwinds with manufacturers continuing to struggle and business investment remaining in the doldrums. It expects the economy to grow by only 1 per cent this year, a more modest forecast than the Treasury’s expectation of 1.25 per cent growth. David Kern, chief economist at the BCC, said of the figures, which are being released today: “These results support the view that GDP growth remained positive in the first quarter, but the recovery is set to remain fragile and sluggish. A double-dip recession is still a risk, even if we get two or three quarters of positive growth.”

The official verdict on economic growth in the first quarter will be published by the Office for National Statistics on April 23, two weeks before the election. The BCC, which polled 5,500 companies, says that manufacturing sales largely stagnated during the period, while orders fell. This is in stark contrast with last week’s upbeat PMI survey of UK factories, which suggested that activity rose in March at the fastest pace in 15 years.

Analysts say that recent PMI surveys have been too optimistic. “The manufacturing sector is still struggling to enter the recovery phase,” Dr Kern said.

Manufacturers’ confidence about the future remain broadly stable, the BCC says, although the balance of companies expecting turnover to increase has edged down from 36 in the final quarter of 2009 to 34 in the first three months of this year.

Service companies have reported a continued improvement in business, with all but the smallest reporting a rise in domestic orders and all enterprises signalling that export orders have jumped. Business sentiment among service firms has also risen, with the balance of companies expecting profits to improve climbing from 30 to 32.

The BCC says that business investment remained muted, risking future growth. “Unless the sharp declines in capital investment are reversed, the UK’s productivity will plummet further and the economy will lack the capacity to meet growing demand when the recovery gains momentum,” Dr Kern said.

Fears over a further rise in unemployment were fuelled as the balance of employment among manufacturers plunged from 3 to -16. However, the balance among services firms picked up slightly from -3 to 3.

The BCC forecasts that unemployment, which stands at 2.45 million, will climb by another 200,000 this year to peak at 2.67 million.

The gloomy outlook for unemployment was further underlined as the Recruitment and Employment Confederation and KPMG warned that the recent pick-up in staff appointments could grind to a halt when jobs are cut in the public sector.

The monthly jobs index from REC and KPMG showed that the number of permanent staff placed by recruitment consultancies rose at the strongest pace in 12 years in March.

However, Bernard Brown, partner and head of business services at KPMG, warned: “The public sector recession, which is clearly on the cards, hasn’t hit the jobs market yet but when it does, the upwards trend we have seen over the last couple of months may come to a halt.”

Economists said that widespread cuts could also strike the construction sector, which expanded in March for the first time in more than two years.

The closely watched CIPS/Markit PMI construction index rose from 48.5 to 53.1 in March — well above the 50 mark that separates expansion from contraction. Howard Archer, chief economist at IHS Global Insight, said: “The construction sector is likely to to be hit significantly by the Government’s need to rein-in its spending for an extended period as this is bound to hit expenditure on infrastructure and public buildings.”

Source: ' Times '

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