By William Schomberg
LONDON (Reuters) - From the shop floor of precision engineering firm JJ Churchill, the return to health of Britain's recession-damaged economy seems to be fully on course.
The firm invested heavily in advanced lathes and milling machines even as orders plunged during the steep downturn, betting that when demand returned it would be ready for it.
Now, as Britain grows faster than the world's other big rich economies, orders are flooding in to the plant near Birmingham
from clients such as Rolls-Royce, which buys Churchill blades for its jet engines, and Siemens, parts for its power-generating gas turbines.
"The amount of work we're putting through the equipment is increasing dramatically," said Andrew Churchill, the firm's managing director and grandson of its founder. "Machines that were used on one shift will move on two or even three shifts."
The Bank of England hopes that many other British companies can respond in a similar way to stronger growth, without running into post-recession bottlenecks that could fuel inflation.
Data due on Tuesday is likely to show that, in the first three months of this year, Britain's economy came within a whisker of recovering its size before the 2008-09 recession. Many other rich countries passed that milestone long ago.
But to keep the recovery on track, it is vital that Britain's poor productivity - a measure of how much the economy produces compared to the number of people in work, or their hours at work - picks up.
BOTTLENECKS AHEAD?
Britain has had the worst productivity performance among the Group of Seven nations since 2008 as firms held on to workers for when demand eventually recovered. A rebound would help provide the extra profits needed to pay higher wages and put the economy on a sound footing.
Yet it remains unclear how much longer Britain can carry on expanding at its current pace without stirring the kind of inflation pressures that might force the Bank to raise interest rates sooner and possibly higher than it has been signalling.
The Bank is cautious about the chances of a long-awaited recovery in productivity which it expects to grow only slowly over the next three years. A recent hiring surge, stronger even than growth in the overall economy, has underscored how quickly the labour market is tightening.
Inflation is at a four-year low but house prices have leapt by about 10 percent over the past year. That could soon put to the test the BoE's intention to use its new powers to control the housing market without resorting to higher interest rates.
The International Monetary Fund warned this month that Britain's recovery remained too reliant on consumer spending and pointed to risks from the country's "surging" house prices.
And many firms are struggling to find staff. Recruitment difficulties among manufacturers hit a record high in late 2013 before easing a touch, the British Chambers of Commerce says.
POSITIVE SIGNS
For others, there are signs that things will go smoothly.
Exports are inching up, helped by an easing of Europe's debt crisis. Consumer spending, while still the key driver of the recovery, is growing less quickly than before the crisis, tempering concerns about an unsustainable recovery.
Earnings are about to outpace inflation after six years of falling living standards but a surge in pay is unlikely, given how many people still have no job or work too few hours.
Another boost could come from Britain's recovering banks which are expected to once again prioritise lending to more profitable firms over struggling ones, something that would boost productivity.
Potentially most significantly, companies are starting to invest more to make their operations more efficient. Business investment grew in each of the four quarters of 2013, even if it remains almost 20 percent below its pre-crisis peak.
Some economists are hopeful that productivity could pick up surprisingly quickly as demand returns.
Samuel Tombs, at Capital Economics, pointed to the transport and hospitality sectors, saying train operators and restaurants, for example, could cope with more customers without having to invest more.
Yet there are regular reminders of pressure growing in the labour market, something that could eventually reverse the recent fall in British inflation. Employers are raising salaries they offer to new permanent staff at the fastest rate in nearly seven years, a recent survey found.
At Blue Hub Solutions, a small software firm in Britain's Midlands region, recruitment is one of the biggest headaches as orders pick up for its online back-office systems used by manufacturing, engineering and freight firms.
The company of seven spent months looking for a new programmer and had to increase its starting salary for new employees by 15 percent over the past year.
"We have to be quite competitive in the first place now, I find, which is stretching us a wee bit," said Matt Flanagan, one of the firm's directors. "But if they are good people, then their contribution back far outweighs their salary in the end."
(Editing by Andrew Roche)