GDP increases but recovery still looks fragile

WEST MIDLANDS businesses remain concerned about the fragility of the economy despite signs of growth in the latest GDP figures.

Evidence of the fragile recovery comes in the latest GDP figures showing a 0.2% growth during the first quarter of this year.

The rise was less than the final quarter of 2009 when the figures showed a 0.4% growth.

However, there had been pessimistic forecasts that the increase in VAT, the poor weather and fears over rising inflation fuelled by higher oil costs might have a severe impact on the fragile recovery.

What is most pleasing from last week’s figures is the growth in manufacturing, up 0.7% compared with the previous quarter.

The figures suggest that manufacturers are seeing a resurgence in demand for their goods, with the weak pound once again making their goods attractive to foreign markets.

Earlier forecasts suggested that while the remainder of this year looks tough, an export-led recovery could well take place in 2011 and beyond.

The figures will be welcomed news for the West Midlands business community, where the manufacturing sector plays such a crucial role in determining the health of the region’s economy.

They would suggest that the earlier forecasts for growth are well founded, provided sterling continues to make UK goods competitive.

Business leaders in the region said the figures were an indication of how fragile the recovery continued to be.

Will Rogers, policy advisor at Birmingham and Solihull Chamber of Commerce and Industry (BCI), said the manufacturing upturn remained critical if a rebalancing of the economy was to take place.

“The competitive position of sterling should provide the sector with some of the necessary export advantages to stage a sustainable recovery, but the exchange rate is not enough on its own,” he said.

“The latest figures combined with national output statistics, which saw manufacturing rise by 1.4% in February 2010, paint a mixed picture for our economy.   

“Chamber’s latest research found that sales figures in both manufacturing and services remain historically low although conditions for the services sector are slowly continuing to improve.”  

He added it was imperative that manufacturing and all businesses were better supported, with access to finance improved, so growth could be sustained throughout the second quarter.

However, he said the new Government would have to address the situation quickly to make sure the recovery did not stagnate.

In addition to manufacturing, output also rose across the business services and financial sectors.

Nevertheless, overall GDP declined 0.3% over the quarter when compared with the corresponding period last year.

Business services and finance was the largest contributor to the positive growth this quarter. Total production, transport, storage and communication and government and other services also contributed to the increase.

This was partially offset by a decrease from distribution, hotels and restaurants and construction.

The production industries increased 0.7% compared with an increase of 0.4% in the previous quarter.

Mining and quarrying decreased 0.7% and electricity, gas and water supply increased 2.5%.

The production industries decreased 0.4% when compared with the first quarter last year.

Elsewhere, construction decreased 0.7%, which compared with a 0.9% in the previous quarter.

Distribution, hotels and restaurants decreased 0.7% compared with an increase of 1.9% in the previous quarter. Motor trades, retail and wholesale made the largest contribution to the decrease.

Transport, storage and communication increased 0.2% against the same quarter in 2009.

Government and other services showed zero growth,compared with a decrease of 0.1% in the previous quarter.

Ian McCafferty, CBI chief economic adviser, said: “The UK economy continued to expand over the first quarter of this year, but growth was slower, much as we expected. With the end of the VAT cut and the car scrappage scheme, weaker spending within the motor vehicles, retail and wholesale sectors came as no surprise.
 
“Our recent survey data for different sectors of the UK economy show improvement across a range of key economic indicators. However, we still anticipate relatively slow growth this year.”

Bruce Undy, Warwickshire and Coventry Chairman of the Federation of Small Businesses said: “The 0.2 per cent growth in the UK economy over the first quarter of 2010 shows encouraging signs that we are on the road to recovery. However, coupled with the fall in employment announced this week it is evident that that the situation is fragile and business confidence remains weak. Small businesses will be instrumental in securing further growth and we urge the next government to continue to support small firms and ensure that they have better access to fairly priced finance.”