Businesses felt confident during first quarter of 2017, but inflation risks undermining growth in the future


The sun is shining for UK businesses, but inflation storm clouds could be on the way (Source: Getty)

The confident manufacturing and services sectors are driving UK growth, research out today found, but that growth risks being undermined if inflation isn't kept in check.

The survey by the British Chambers of Commerce (BCC) discovered the net balance – the number of firms which agreed with the statement less the number which disagreed – of manufacturing firms which believed their turnover would increase over the next 12 months rose from 43 per cent to 44 per cent for the first quarter of the year.

For services businesses, this measure increased from 35 per cent in the fourth quarter of 2016 to 39 per cent in the most recent quarter.

Meanwhile, the balance of manufacturing firms reporting their domestic sales had risen during the most recent quarter increased from 15 per cent to 20 per cent, while the proportion which said their export sales had improved rose from 16 per cent to 26 per cent.

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In the services sector, those reporting their domestic sales had increased rose from 15 per cent to 22 per cent, while the balance saying export sales were on the up rose from eight per cent to 10 per cent.

However, the BCC also warned all the firms' good work could come undone if inflation gathered pace. Over three-quarters (76 per cent) of manufacturing firms revealed the price of raw materials they use had increased, compared with 65 per cent in the quarter before, and 38 per cent reported an increase in other overheads, compared with 23 per cent.

In the services sector, the proportion reporting the price of their raw materials had increased remained flat at 17 per cent, while 28 per cent said the costs of their other overheads had increased, up from 24 per cent.

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"The rise in inflation seen since last year's EU referendum is the biggest immediate pressure facing most firms," said Dr Adam Marshall, director general of the British Chambers of Commerce. "While manufacturers have enjoyed a good quarter, they are facing higher costs at the factory gates, which increasingly translates into companies having to raise their own prices."

A separate report, also published today, from the Federation of Small Businesses (FSB) found confidence among London's small firms had risen to its highest level in over a year, despite increasing costs of doing business. 

Almost half (48 per cent) said they expected their gross profits to rise over the next three months, compared with just 20 per cent who predicted their profits would fall.

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"We are pleased to see members are remaining stoic in the face of economic uncertainty in the capital," said Sue Terpilowski, London policy chair at the FSB. "The expected increases in gross profits in the coming months is great news, however, we need to realise that the hard costs of operating a business in the capital have started to outweigh the benefits which simply does not make economic sense."

Official figures pegged inflation at 2.3 per cent in March, its highest level since September 2013 and above the Bank of England's two per cent target.