UK economy will return to growth but remains weak and bloodied

Business surveys this week quelled fears that the UK is heading back into recession, but other news also made it clear that the pace of recovery is slowing.

Upbeat surveys

The good news came from the CIPS/Markit Purchasing Managers Surveys.

The data on the services sector, which accounts for around three quarters of the economy, rebounded sharply from December's lows and hinted at some reasonably solid growth.

There was a similarly upbeat picture in the construction and manufacturing surveys. Manufacturing has been one area of the economy that has been consistently strong for a few months now. But before anyone gets too carried away thinking this may be a re-birth of industry, we need to remember that the sector shrank more than the others during the recession.

And if, as some data suggests, the sector has been bolstered by a weak pound then the renewed talk of interest rate increases in the months ahead is another cause for concern. Higher rates mean a stronger pound which could hobble the sector going forward.

The truth on the streets

In any case, the recovery in the three sectors still only points to very modest growth of around 0.4% in the economy as a whole.

While it is certainly reassuring that the services survey was better than expected, you only have to ask your friends or walk down your local high street to know the outlook for sector is far from robust.

John Lewis, one of the few chains that has been growing solidly during the downturn, saw sales fall for the second week in a row while car sales were 11.5% lower a year ago.

Customers trading down

More worrying yet was data from the supermarkets, also normally resilient in a downturn. Numbers on market share this week showed consumers have responded to higher food and oil prices, rising VAT and interest rate worries by trading down.

Sales fell at Asda and Tesco but climbed as much as 9% at discount food groups Aldi and Lidl.

A reluctant shopper makes policy makers nervous, so news from the British Retail Consortium that nearly a third of shoppers say they ‘have no spare cash’ can only add to the chorus of voices saying that the Bank of England must stay firm and keep rates low even as inflation rises.

Disappointing corporate results

While many had been hoping that our largest companies would provide some much-needed cheer, the performance has been mixed to data as oil giants BP and Shell, healthcare group GlaxoSmithKline and household goods group Unilever were just some of the big global companies that failed to live up to expectations.