Recovery will defy the slumping figures, analysts claim

IT HAS BECOME accepted wisdom in recent weeks that the economic recovery is faltering. After two years of steady, even heady, growth the statistics seem to be saying that British industry is slowing down again. But according to the City and many industrialists, reports of the recession's demise are definitely exaggerated.

A survey published tomorrow by CCN Business Information, a firm of financial analysts, appears to confirm the gloomy view. Although the economy remains fundamentally strong, a review of the first quarter's results of the top 1,000 companies shows that corporate liquidity has weakened and growth has levelled off. This echoes last week's survey of 8,000 companies by the British Chambers of Commerce, which suggested that last year's growth surge was petering out. It also almost certainly prefigures the Confederation of British Industry's quarterly trends survey, to be published on Tuesday, which is likely to show business as being fairly gloomy about its prospects.

CCN also warns that companies are making a rod for their own back. "There is still no sign that industry is prepared to invest in new plant and equipment," it says. "On the contrary, the evidence points to a greater priority on restoring dividends."

This lack of investment means that companies will be faced with insufficient capacity when consumer confidence returns.

"The first-quarter results indicate that the combination of low investment and the lack of consumer confidence might already have knocked the steam out of the recovery," concludes David Coates, managing director of CCN.

"I have no doubt that investment is lagging behind - people are hanging back because they feel uncertain," says Richard Freeman, chief economist at ICI. "It's a long-term problem. We have always under-invested - less than the Germans, Americans or French. There is a higher proportion of earnings going into dividends than normal."

But the gloom is not universal. The export sector, helped by the weakness of sterling, is still booming - cars sales abroad, for instance, are at their highest for 20 years. Other areas of industry also see little sign of a slackening in activity.

"There was a jump in sales to the European continent, especially Germany, last year, and that trend will continue this year," says Nick Boucher, planning manager of Glynwed International, the Birmingham- based engineering conglomerate.

"I don't understand the surveys showing slowing investment. Our capital expenditure was £22m last year and will be 50 per cent higher this year. It's necessary to invest to stay competitive," he adds.

The City, in particular, disagrees with the conventional wisdom. "We may have a growth pause and a period of consolidation, but nothing more than that," says Mark Tinker, equity strategist at James Capel. UK growth last year was 4 per cent compared with an expected 3.7 per cent this year.

That, most analysts say, is not a large enough decline to make any significant difference to the recovery. The City equally rejects the idea that industry is not investing enough.

To begin with, there was heavy investment in 1990 and 1991 in anticipation of an upturn that never came. Large areas of business, therefore, now have little need to invest - which does not mean they will suddenly find themselves short of capacity.

There is also a redistribution of capital going on at present, argues BZW. "The key is the cashflow in the corporate sector, which is still strong, but it is heavily concentrated in certain areas," says Richard Kersley, BZW's equity strategist. Some 60 per cent of cashflow among the FT-SE 100 is being generated in only six sectors ranging from electricity and telecommunications to food producers and general retailers.

These are not areas requiring high investment, so surplus cash is being siphoned off in the form of higher dividends and share buy-backs. This will eventually find its way into manfacturing sectors that may need investment but currently lack the necessary cash to do it.

In any case, argues Darren Winder, chief UK economist at SG Warburg, investment has already picked up. It rose 20 per cent in the last quarter of last year and is now running at an annualised rate of 8 per cent - the highest since 1989.

"I think the official figures showing a slowdown in the economy will turn out to be an underestimate, as they have in the past," says Mr Winder. "There is conflicting evidence, such as the growth in narrow money, which contradicts the theory that the recovery is faltering."

Analyst argue that the pessimists pay too much attention to the supposed sluggishness of consumer spending. The retail sales figures, which have started falling, only show part of the picture. They do not record rises in consumer spending on services that usually pick up first in a recovery. "I can't see why consumer spending should be weak," says Mr Winder.

What is going on in British business, says Mr Tinker, is a swing back towards manufacturing driven by strong export markets. There is a simultaneous swing away from the over-concentration on the high street during the 1980s, but that is currently being misinterpreted as an overall lack of consumer spending.

The gloom in some quarters of business may be part of an attempt to persuade the Chancellor not to raise interest rates over the next few weeks. Yet the City regards an interest rate rise as essential to damp down rising inflation rate - now at 3.5 per cent compared with the Government's 2 per cent target - in order to maintain the virtuous circle of growth with minimum inflation.

The good news is that the economy is still robust enough to withstand this unpleasant medicine and turn in an above-average growth performance for 1995.

Indicators

Rising car production and increases in BAA passenger and cargo traffic helped to give the index a lift from 100.67 to 101.42 on the week. The index is based on forecasts and actual activity by 24 monetary, industrial, financial and commercial indicators

London close change over week change over year

£/$

£/DM

£/Yen

£ index*

$/DM

$/Yen

$ index*

*Bank of England trade weighted index

£/$

£/DM

$/DM

$/Yen

1.6063

2.2111

1.3765

82.91

1.6084

2.2011

1.3747

82.04

1.6050

2.1977

1.3693

81.04

1.57

2.26

1.44

95

1.57

2.35

1.50

95

UK

Australia

Belgium

Canada

France

Germany

Italy

Japan

Neth

Spain

Sweden

USA

OECD

Inflation

annual change, %

latest year ago

2.3

2.0

2.3

0.2

1.5

3.2

4.2

1.3

3.0

5.0

1.7

2.5

3.9

Interest rates

3 m'th money mkt, %

latest year ago

6.69

8.00

5.44

8.00

8.06

4.65

10.88

1.39

4.70

8.60

8.98

6.25

-

5.31

4.92

5.88

6.13

6.00

5.58

8.00

2.34

5.30

8.62

7.48

4.25

-

GNP/GDP growth

annual change, %

latest year ago

4.2

3.5

-0.7

5.6

3.8

2.7

2.7

0.8

2.1

-1.0

2.1

4.4

3.5

2.4

3.4

1.7

3.2

-1.0

-2.0

-0.3

-0.7

3.9

0.8

2.3

3.0

4.5

UK

Australia

Belgium

Canada

France

Germany

Italy

Japan

Neth

Spain

Sweden

USA

OECD

Industrial prod'n

annual change, %

latest year ago

3.8

6.7

-2.0

10.2

5.6

7.8

7.6

7.2

-0.4

15.3

16.1

4.5

6.8

3.9

0.8

-3.4

4.8

1.5

-1.1

-0.1

-4.3

-1.4

3.7

11.3

3.9

2.0

Unemployment

rate, %

latest year ago

8.4

8.7

10.3

9.7

12.3

9.1

11.8

2.9

7.2

23.5

8.2

5.5

7.5

9.7

10.3

10.2

10.6

12.4

9.2

10.3

2.9

7.3

23.5

8.8

6.5

8.0

Current account

last 12 months, $bn

latest year ago

0.8

-17.8

12.6

-18.1

9.9

-32.1

11.4

125.0

12.0

-2.8

1.0

-155.8

-

-1.5

-11.0

6.2

-23.8

9.6

-18.9

8.9

131.5

6.75

-2.3

-3.2

-103.9

-

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