The economy continued to recover in the first quarter of this year, a clutch of industry surveys showed on Wednesday, but concern about a public spending squeeze is making firms reluctant to invest.

A survey from the British Chambers of Commerce showed export balances for both services and manufacturing firms improved at the start of this year. However, investment balances worsened and confidence remained low by pre-recession standards.

There was also a marked divergence between the services sector, which continued to strengthen, and the manufacturing sector which stagnated.

"The results support the view that GDP growth stayed positive in the first quarter, but the recovery is set to remain fragile and sluggish," said David Kern, BCC chief economist.

A separate survey from the Recruitment and Employment Confederation showed the number of people placed in permanent jobs rose last month at the fastest rate since October 1997.

However the report noted that the return of confidence was confined to the private sector and the public sector was set for a long period of belt-tightening.

"The public sector recession which clearly is on the cards hasn't hit the jobs market yet but when it does, the upward trend we have seen over the last couple of months may come to a halt," said Bernard Brown, a partner at KPMG.

FRAGILE RECOVERY

The health of Britain's economy will be a key issue ahead of an election on May 6 which is shaping up to be the least predictable fight since 1992.

The economy's emergence from recession in the fourth quarter of last year allowed the Labour Party to regain some popular support.

Polls are now pointing to a "hung parliament" with the Conservative party having a greater share of the vote but not enough seats in parliament to secure an overall majority.

An inconclusive election result is the worst-case scenario for financial markets, which want the next government to have a clear mandate to tackle a budget deficit forecast to exceed 11 percent of GDP in the 2010/11 fiscal year.

The only favourable wind at the moment is coming from record low interest rates. The Bank of England slashed rates to 0.5 percent in March last year and is not expected to raise them until the fourth quarter of this year at the earliest.

Inflation, which surged well above target at the turn of the year, looks set to be abating and most economists expect it to retreat below 2 percent by the end of the year.

There was good news on that score from the British Retail Consortium which said shop price inflation slowed to 1.2 percent last month, its weakest pace since November.

"Falling shop price inflation is particularly welcome relief for consumers as they face sharp rises in other living costs, such as fuel," said Stephen Robertson, director general of the British Retail Consortium.