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UK economy brightens

UK economy brightens

Hopes of an economic recovery increased this week, as two surveys pointed to brighter business conditions.

On Monday, research group Markit's poll of purchasing managers found manufacturing activity to be at a 10-month high, with rises in domestic and export orders. On Tuesday, the British Chambers of Commerce (BCC) reported a "welcome improvement in the economic situation", with rising orders and manufacturing investment intentions.

Andrew Goodwin of Ernst & Young's Item Club says it is "almost certain" that GDP grew in the first quarter – rebutting the OECD's assessment last week that the economy has been in recession. "The manufacturing recovery appears to be gaining momentum," says Blerina Uruci at Barclays Capital.

But there are still obstacles to recovery. One is that some of the recent growth in output has been due to firms building up stocks of unsold goods; the purchasing managers' survey found inventories to be rising at a record rate. This means that increased orders might be met by running down stocks rather than increasing production.

Secondly, the weakness of the euro area economy threatens to hold back export growth. Official figures this week showed that unemployment in the region has risen by over 1m since August, to 17.1m or 10.8 per cent of the workforce. Most economists expect more rises in the coming months.

Thirdly, the prospects for capital spending aren't wholly bright. The BCC's survey said investment intentions in services were "weak" and that business confidence was still low by historic standards.

Also, the outlook for consumer spending is still poor. The BCC's survey found that employment in the services sector is "disappointingly weak"; growth in spending is unlikely without growth in jobs. And Mr Goodwin says there's a danger that rising oil prices will continue to squeeze households' real incomes and spending.

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By Chris Dillow,
04 April 2012

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Chris Dillow

Chris spent eight years as an economist with one of Japan's largest banks. Here, he provides insightful commentary on the latest economic news and data, along with thought-provoking articles about investor behaviour.

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