LONDON (Thomson Financial) - The UK manufacturing sector saw a "major improvement" in activity during the second quarter, a survey by a leading business lobby found.
The latest quarterly poll by the British Chamber of Commerce found that the manufacturing sector's home sales and orders were both at 12-year highs, while exports, investment and employment were also very strong.
The performance of the services sector was mixed, however, showing declines in exports and investment but improved levels of employment.
"The second quarter 2007 results show a major improvement in manufacturing balances and a mediocre performance of the service sector," the BCC said.
The survey highlights the resilience of UK businesses in the face of recent rises in interest rates, the lobby group said, warning that further increases may well be on their way.
"Given the resilience signalled by these results we are concerned that they could reinforce the pressures for further interest rate increases," said David Kern, economic adviser to the BCC.
The Bank of England has raised interest rates five times since August last year, taking the key repo rate to 5.75 pct, its highest level in nearly six years. A further rise to 6.0 pct, and possibly beyond, is broadly expected.
The prospect of "relentless monetary tightening" is very worrying for UK businesses, Kern said, adding that there is a "distinct risk" of a "very sharp and painful" slowdown in economic activity.
"Although growth is robust, there is no evidence that the UK economy is overheating," he said. Labour costs "remain under control", while the survey shows falls in the capacity utilisation balances.
The details of the survey revealed that the net balance of firms reporting a rise in home sales in the manufacturing sector, jumping to +31 pct in the second quarter from +26 pct in the first quarter, equal to a 12-year high, while the home orders balance rose to a 12-year high of +29 pct from +23 pct.
For the services sector, the home sales balance rose 9 points to +36 pct, the highest in two years, but the home orders balance fell four points to +24 pct, the lowest since the third quarter of 2006 and weaker than the equivalent balance for manufacturing.
On exports, the balances in the manufacturing sector improved markedly, with sales rising nine points to +30 pct and orders up 6 points to +26 pct, both the highest since the third quarter of 2006 and "relatively strong by historical standards".
The services sector's performance worsened, however, with sales falling five points to +20 pct and orders by 6 points to +13 pct.
Employment meanwhile strengthened in both sectors. The manufacturing employment balance rose 8 points to +17 pct, while the employment expectations balance rose 3 point to +14 pct. In services, the employment balance rose 7 points to +21 pct and expectations were up 5 points to +33.
BoE rate-setters, however, will be relieved to see prices remaining relatively stable. The balance of manufacturing firms reporting pressure to raise prices rose by one point to +24 pct, while in services the balance fell two points to +28 pct. Both are "well below recent peaks", the BCC said.
On investment, the survey showed the balance of manufacturing firms planning to increase investment in plant and machinery jumped 10 points to a historic high of +28 pct, while in services there were small falls.
Business confidence levels were mixed, with the manufacturing sector's turnover confidence balance increasing eight points to a ten-year high of +61 pct, but manufacturing profitability confidence falling 3 points. Confidence levels in the services sector showed only very small net changes.
jessica.mortimer@thomson.com
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