The British Chambers of Commerce Q1 2007 Quarterly Economic Survey of 4,700 businesses appears to indicate that the cumulative impact of the three recent interest rate increases has significantly dampened the pace of economic growth and the pressure to raise prices
The Q1 2007 balances show distinct declines for both the Service and Manufacturing sectors, signalling a clear weakening in the pace of activity.
The manufacturing sector recorded weaker balances for home sales & orders, employment and employment expectations, investment and cashflow.
The service sector’s Q1 balances weakened for home sales & orders, export sales & orders, employment, confidence and cashflow.
Critically, in comparison to the 2006 Q4, the Q1 results show that pressures to raise prices were markedly down, in both manufacturing and services. Clearly businesses are taking a more modest and realistic view about their pricing power.
David Kern, Economic Adviser to the British Chambers of Commerce, said: “The cumulative impact of the three interest rate increases announced since August 2006 have inevitably dampened significantly the pace of economic growth. The results of this survey strongly indicate that the MPC should resist the recent clamour to raise interest rates and set to one side the exaggerated perceptions of growing business pricing power.
“We do acknowledge that inflation is still a potential danger, but there are powerful arguments suggesting that demand pressures will slow, and inflation will decelerate, without additional tightening. With average earnings growth below RPI inflation, UK disposable incomes are being squeezed and spending will inevitably decelerate. Moreover, the recent rise in sterling is exerting a dampening effect on economic activity and inflation.
“Given the underlying uncertainties, there are powerful arguments for the MPC to wait before raising rates, so as to avoid damaging the economy unnecessarily. An increase in interest rates at this time would pose new and unpredictable threats for British business. The Budget increase in the Small Companies’ Rate is a blow to confidence, and the harmful effects of recent interest rate increases are not yet fully felt. A marked slowdown in activity is highly likely even if Bank rate stays at its current level. But higher interest rates would entail major additional risks. It is particularly important to avoid damaging monetary overkill.”