Trendy growth

Survey points to fragility of UK economy.

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By Jamie Chisholm, Economics Reporter

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Confidence and domestic sales improved in the final quarter of last year but the health of the UK economy remains fragile, according tothe British Chambers of Commerce.

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The report dovetails with other recent data, suggesting growth isstarting to pick up but remains anaemic and below trend. The latest quarterly survey from the BCC showed the service sectorcontinued to expand with sales at home and abroad rising.

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Hard pressedmanufacturers also enjoyed a rebound though this was restricted toservicing domestic demand. Home sales for manufacturers jumped from a positive balance of 3 in thethe third quarter to 13 in the final quarter, and home orders climbedfrom minus 3 to plus.

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However, there was disappointing demand fromoverseas, with export sales and orders falling from 14 to 12 and 8 to 7respectively.

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David Frost, director general of the BCC, expressed concern for producer's prospects. "Manufacturing has persistently failed to sustain a recovery and, inspite of the modest Q4 improvement, the sector faces acute threats,"said Mr Frost, concluding: "Any UK recovery in 2006 is likely to be weakand below trend. Without supporting action by the Bank of England andthe chancellor, there is a danger of renewed relapse."

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The survey confirmed the worsening of the labour market. Official datareleased on Wednesday showed the rate of unemployment breaching 5 percent for the first time in two years and the BCC report revealed thebalance of expectations for employment fell for both manufacturers andservice companies.

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Given the uptick in activity, analysts were disappointed to note that manufacturers' investment intentions were weaker, though the sector maybe able to improve margins after more respondents said they would expectto raise their prices in the next three months.

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Commenting on the report, Howard Archer at Global Insight said: "The BCC survey shows that the capital expenditure plans of manufacturers andservices companies currently remain somewhat limited. "The deterioration in the labour market threatens to weigh down onfuture consumer spending. Overall, the survey supports the case for afurther interest rate cut, although the Bank of England will not behappy to see that the prices index for the manufacturing sector rose toits highest level for a year, while the services sector prices indexstabilised at the third-quarter's increased level."