Recovery in doubt as construction slumps
LONDON (Reuters) - The economy is too weak to produce a meaningful recovery, the British Chambers of Commerce warned on Tuesday, as a survey showed construction activity fell at its fastest pace in two-and-a-half years in June.
The gloomy outlook makes grim reading for the government and Bank of England who are facing increasing calls to kick-start growth in the recession-hit economy.
Trade group BCC said its economic survey of around 8,000 businesses suggested only marginal growth in the second quarter, in line with a 0.1 percent forecast in a Reuters poll.
But a steep drop in construction activity in June's Purchasing Managers' Index (PMI) survey increased the danger of a third consecutive quarter of contraction.
"While domestic growth continues to bump along the bottom, the silver lining is an increase in firms looking for export opportunities, and in many cases, with countries outside Europe," said John Longworth, director general of the BCC.
The BCC predicts economic growth of just 0.1 percent for 2012 but say it will pick up to 1.9 percent in 2013 on an upturn in exports to countries outside Europe.
Businesses' confidence was still lower than before the crisis in 2007, and plans by manufacturers to invest in plant and machinery fell, the BCC's survey showed.
But with minimal growth ahead at best, and only a mild improvement this quarter from London's hosting of the Olympic Games, the BoE is widely seen restarting its quantitative easing (QE) asset purchase programme.
The central bank is expected to top up the 325 billion pounds of cash it has already pumped into markets with another 50 billion when it meets on Thursday as falling inflation gives it more scope to support the battered economy.
"The latest quarterly economic survey from the BCC suggests that the economy remains sluggish. The activity readings are not as weak as shown by the official GDP data, but do suggest that the economy lacks momentum," said Michael Saunders at Citi.
Saunders also pointed out that effective interest rates for loans to small businesses as well as for mortgages kept rising, despite the BoE's ultra-loose monetary policy, adding another constraint to growth.
The government and the central bank are trying to get credit flowing through the economy by easing banks' funding costs, which are driven up by the uncertainties over the euro zone.
But the BCC urged the government to be bold. "Growth cannot wait. The government must take an imaginative and brave approach to stimulating the economy and helping businesses thrive," Longworth said.
Britain fell back into recession around the turn of the year and a string of weak economic data has pointed to another quarter of contraction between April and June.
Construction, which was the biggest drag on the economy during the first three months of 2012, suffered its biggest monthly decline since February 2009 when stock markets were crashing, a drop in the Markit/CIPS construction PMI sank to 48.2 from 54.4 in May showed.
"There is now a very real danger that construction output contracted again in the second quarter," said Howard Archer at IHS Global Insight.
Factories also cut back on activity in both May and June, while a PMI poll of firms in the dominant service sector due on Wednesday is expected to show only tepid growth.
Domestic demand is weak but the BCC survey found an improvement in exporting activity, particularly to countries outside of battered Europe - Britain's main trading partner.
The increase in exports will provide some cheer for the government, which is trying to rebalance Britain's economy away from a reliance on public spending and consumer demand.
Lending to consumers picked up in May and mortgage approvals fell less than forecast, BoE data showed, but the overall environment for consumer credit remains weak as the economy struggles with tight credit conditions.
"It's just more of the same. Why would anyone expect anything else, the household sector is up to its eyeballs in debt, it's trying to de-leverage and this process is going to run for several more years," said Ross Walker at RBS.
(Additional reporting by Sven Egenter and David Milliken; Editing by Ron Askew)
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