Economic activity in the UK fell by 0.2 per cent in the final three months of last year. Figures from the Office for National Statistics (ONS) show a marked drop in economic activity from the third quarter of 2011, when gross domestic product (GDP) grew by 0.6 per cent. These figures are a preliminary estimate, however, and are likely to be revised.
The figures came on the day when CBI Scotland published its latest Industrial Trends Survey. This shows Scottish industry planning to scale back investment plans in the coming year following a stumble in business confidence over future prospects. Business optimism has dropped to its lowest level for three years.
This drop in confidence, coupled with concerns over economic conditions abroad and a spike in uncertainty about future demand, is causing firms to scale back their plans to invest in innovation, training, buildings and machinery. It is the first time in three years that a majority of firms have reported their intention to reduce expenditure across all four investment indicators.
The survey also reports that the total volume of new orders dipped further over the past three months, remaining negative for the third successive quarter and at their weakest level since January 2009. Expectations for the next three months are at their weakest since April 2009.
Commenting on the results, Iain McMillan, director of CBI Scotland, said that there was “no getting away from the fact that this is a further set of disappointing results. A weak economy and worries over the eurozone, our biggest export market, are affecting business confidence, and this is leading firms into shrinking their investment plans.
“A clear and orderly resolution to the eurozone crisis will be essential to prevent further effects on both domestic manufacturing and the wider economy, and to lift business confidence.
“There are things government can do to assist,” he added. “The Scottish administration has set a welcome target for export growth, but they need to put much more flesh on the bones as to how this step change in performance will be achieved. Scottish ministers should provide pump-prime funding to help establish more direct air connections to key overseas business destinations and hubs, in order to make it easier for Scots manufacturers to access new markets.”
Nationally, Joe Grice, chief economist with the ONS, pointed out that the figures were “not entirely unexpected because of what's happening in the world and what's happening in the eurozone crisis. The truth is that dealing with those problems is made more difficult by the situation in the eurozone.”
The new figure was slightly worse than expected. Economic activity fell across the board with a 0.9 per cent fall in manufacturing and a 0.5 per cent fall in the construction sector, with the services sector, which accounts for two thirds of the economy, virtually grinding to a halt. Perhaps surprisingly, the mild early part of the winter didn’t help, with a 4 per cent drop in electricity and gas production as people turned down their central heating.
The new figures are the latest in a series of announcements, all bad news for the government. At the start of the week, the governor of the Bank of England, Sir Mervyn King, warned that the UK faced “an arduous path” to economic recovery. And on Tuesday, the International Monetary Fund also cut the growth forecast for the UK economy in 2012 by 1 per cent to 0.6 per cent.
In the view of the Federation of Small Businesses, the economy is likely to limp on for some time. But Andy Willox OBE, the FSB Scottish policy convenor, says that "the difference between minute growth and a small contraction in the UK economy really means very little to many Scottish small businesses. These firms care more about their own bottom lines, their staff and their plans for the future and less about another volley of gloomy statistics.
“However, if we do want to shorten the dole queues and get the economy growing, it is precisely these firms whose confidence we need to boost. That means concerted action on spiralling overheads, making it easier to create jobs where the opportunities arise and fewer regulatory hoops which simply drive small businesses out of key markets.”
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