There has been a broadening of confidence in more sectors and regions as economic recovery continues at a sluggish pace according to the latest ICAEW UK Business Confidence Monitor (BCM).
Against a backdrop of political uncertainty in the run up and through the General Election campaign, it shows that UK companies are operating within their means and planning with what they already have, rather than taking on new risks.
Key findings for Q2 2010 include:
- Business Confidence Index has stabilised at +25.5. It is dramatically higher than a year ago when it was -28.2
- Six in ten businesses (58%) are more confident about economic prospects over the next twelve months compared to the previous year. This compares to 19% twelve months earlier
- Capital investment to increase by 1.3% and staff numbers by 1.1% in the year ahead as firms remain cautious
- Confidence Index for the Manufacturing and Engineering sector at +30.1 and Property sector at +24.9 but falls in the Construction (+14.4) and Retail and Wholesale sectors (+20.8)
Michael Izza, Chief Executive of the ICAEW, said:
"Businesses cannot allow themselves to be complacent and remain cautious about the outlook. The economy still faces significant challenges, many of which are outside of businesses control. They include measures to tackle the deficit including cuts in public spending, the fallout from the Greek fiscal crisis and imported inflation linked to sterling depreciation. Until prospects for the future become clearer, UK plc is continuing to manage risk, cut costs and not expose itself to potential risks outside its control, leading to a slower than expected recovery. "
Key financial indicators show modest growth
Business financial indicators tracked in the BCM reveal that although businesses expect growth, they are still cautious about increasing investment and taking on new staff. Increase in capital investment for the coming year is a modest (1.3%) compared to a decline of -0.8% the previous year. Staff numbers are also only expected to increase by 1.1% versus a fall of -2.0%. year to date. Although encouraging, both remain considerably weaker than seen pre-recession and demonstrate the guarded approach companies are taking.
Steady as it goes
BCM also shows that the rate of decline in turnover slowed to 0.4% over the last year and firms expect growth of 5.4% in the next twelve months. Despite this, price and wage growth expectations are low. In addition three in five businesses are still operating below capacity leaving room for growth without adding too much to costs. This, combined with a slack labour market, means domestically generated inflationary pressures are low.
Challenges to business performance fall
There are further signs of a strengthening market as the share of businesses reporting level of customer demand as a greater challenge to their performance fell from 46% in Q1 2010 to 39% this quarter. Late payment from customers rose to prominence through the recession as demand weakened and cash flow became critical. Fewer companies are now reporting late payments as a greater challenge than a year ago - 30%, down from 43% a year ago. The proportion reporting access to capital as a greater challenge has reduced from one third (34%) to under a quarter (23%) since Q2 2009.
Economic recovery becoming more broad based
Across the UK as a whole, there was a strong positive trend in confidence from Q2 2009. Confidence across most sectors increased. Manufacturing and Engineering rose from +26.8 in Q1 2010 to +30.1 this quarter. This was supported by ONS data which showed a significant improvement in performance as re-stocking bolstered demand. Confidence also improved in the Property sector (Q1 2010 +19.0 v Q2 2010 +24.9) but was in contrast to Construction where confidence fell from +24.0 at the end of last year to +14.1. Retail and Wholesale also saw a fall in confidence as severe weather at the start of the year, the VAT rate cut reversal and weak growth in real disposable incomes hit consumer spending. The sector Index stood at +20.8, a fall of -6.8 points.
Michael Izza concludes:
"Stabilisation is the key theme from this quarter's Business Confidence Monitor. There has been a broadening of recovery in more sectors, regions and sizes of business. The data also points to the beginnings of a rebalancing of the economy, something that had to happen. Although welcomed, it will be a long time before we reach the growth and indeed expectations of businesses compared to those heady days pre-recession."
For further information please go to icaew.com/bcm