Cheer as output looks set to rise but recovery still fragile for manufacturers

British businesses are preparing to boost their output in the coming months, giving the economy a spring fillip, but tough conditions for exporters continue to hamper the recovery in manufacturing.

The output index from accountancy firm BDO, out today, is the latest business survey to find evidence of green shoots amid Britain’s private sector.

The survey, designed to indicate business conditions three months ahead, reached a nine-month high in March, but the firm warned that the road to recovery remains a long one.

Neil Craig, managing partner for BDO in Glasgow, said: “It’s encouraging to see positive signs for UK growth in the short term, but it’s two steps forward followed by one step back at the moment, as the overall recovery is likely to be a slow one.”

He said businesses faced low demand from Europe and China and high global commodity prices, meaning tough trading conditions for UK exporters.

“It’s vital that the UK government takes steps to ensure the economic recovery is broad-based,” he said.

“Long term economic success hinges on a stable and confident manufacturing sector.

“If British firms are to meet the Chancellor’s recent challenge to double exports to £1 trillion by 2020, then they’ll need a clearer and more explicit framework and strategy to relieve pressure on manufacturers and encourage investment in infrastructure and innovation.”

BDO’s optimism index, which predicts business performance two quarters ahead, fell slightly in March compared with February, but remained at a level which suggests economic growth.

Manufacturers in particular expect to face poorer prospects in the second half of the year, with a score indicating factory production will fall.

BDO said this could be attributed to “stubbornly high crude oil prices”, as well as sluggish growth in the eurozone area – the largest export market for UK goods.

BDO’s survey comes as the Item Club report, from rival Ernst & Young, says the UK narrowly avoided a double-dip recession in the last quarter but will struggle for the rest of the year.

However, the report also offered an insight into how stronger growth may eventually be secured, using the £750 billion in cash piles built up by British firms during the cautious times following the financial crisis.

The Item Club forecast that UK GDP growth will be a “dismal” 0.4 per cent this year, which is half the 0.8 per cent estimated by the tax and spending watchdog, the Office for Budget Responsibility. Item forecast this would rise to 1.5 per cent in 2013 and 2.6 per cent in 2014.

Peter Spencer, chief economic adviser to the Item Club, said the UK would not recover until businesses invested stockpiled cash. He said: “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy.”

The cash balances of private non-financial companies are worth more than £754 billion, the report said. This is equivalent to half of the UK’s annual economic output, but business investment last year only rose 1.2 per cent.

Ernst & Young said emergency measures from the Bank of England, and the European Central Bank and US Federal Reserve overseas, had pulled Britain back from the brink of recession.

The UK economy shrank by 0.3 per cent in the final three months of last year and is broadly expected to have just avoided a technical recession by eking out meagre gains in the first quarter of 2012. The first official estimates for the quarter will be released next week.