The soaring value of the pound has battered Britain’s manufacturing exports, leaving the economy reliant on the consumer-driven services sector for growth, the CBI has warned.
The business lobby group said the UK economy looked likely to gather momentum over the coming months after a steady performance so far this year, but said the strong pound had triggered a slide in export orders.
Katja Hall, the CBI’s deputy director general, said businesses were alarmed by Brussels’ failure to end the Greek debt crisis, which has raised tensions inside the eurozone and dampened hopes of a sustained recovery across the 19-nation currency bloc.
“The main risk to the UK economy comes from the eurozone, with continuing wrangling over Greece’s bailout package stoking uncertainty,” she said. “Plus, many businesses will also have to contend with a stronger pound weighing down on already weak export growth.”
After months of wrangling since the radical left Syriza government was elected in January, Athens has failed to resolve its differences with Brussels and its other major lenders, the International Monetary Fund (IMF) and the European Central Bank. The lurch from one set of crisis talks to another combined last week with renewed weakness in the US economy, where surprisingly weak jobs figures appeared to set back the date when the Federal Reserve raises interest rates.
The IMF is expected next week to reaffirm its view that global economic growth will slow this year, with falling demand in China adding to the negative outlook.
Nevertheless, the forecast of healthy UK growth will allay concerns in the Treasury that a cooling housing market and uncertainty over the outcome of the general election would slow growth. After two years of recovery, the UK is likely to continue to grow faster than most of its G7 competitors.
CBI forecasters said the survey suggested GDP grew by 0.7% in the first three months of the year, slightly faster than the 0.6% in the last quarter of 2014. Firms were also hopeful of a better second quarter.
The poll of 764 businesses showed a positive balance of 18% between firms reporting that performance was up compared with those saying it was down in the three months to March.
But a more detailed look at the figures showed businesses were reliant on UK consumers, who have benefited in recent months from lower petrol prices boosting disposable income.
The survey showed that distribution businesses – which include retail, wholesale and motor traders – strengthened as did consumer services, such as hotels, bars and restaurants, plus travel and leisure firms.
Weaker growth was seen in manufacturing as well as business and professional services – including accountancy, legal and marketing firms – which felt the strain of tougher competition.
Manufacturing and services expected to see a pick-up ahead, with the overall balance of expectations for growth over the next three months at a positive 25%.
However, this was a “significant scaling back” of sentiment compared with this time last year, the CBI said. It blamed the high pound for denting business confidence in the outlook for exports, which the chancellor, George Osborne, has previously targeted in a drive to double exports to £1tn by 2020.
According to official figures, UK exports to the EU’s 28 nations fell 3% to £11bn in January compared with the previous month. That represented an 11.5% fall from January 2014.
Howard Archer, chief European economist at the consultancy IHS Global Insight, said the mixed signals from the economy would force the Bank of England to keep interest rates on hold when its policymakers meet on Thursday. The Bank’s monetary policy committee has kept base rates at 0.5% for six years and is not expected to consider raising them until at least the beginning of next year.
Archer said export industries would be concerned by the overall strength of the pound, especially against the euro.
“Latest survey evidence on foreign orders is mixed. On the positive side, the manufacturing purchasing managers reported a marked pick-up in foreign orders in March to be at a seven-month high.
“In contrast, the export orders balance of the CBI’s industrial trends survey relapsed to a 26-month low of -26% in March after rising to a six-month high of -8% in February from -20% in January, thereby moving below its long-term average of -20.”
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