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Confidence declines as uncertainties start to take hold

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  • Publish date: 03 November 2014
  • Archived on: 03 November 2015

A benefit of ICAEW membership is the opportunity it offers to share business insight with other members. The ICAEW/Grant Thornton Business Confidence Monitor (BCM) analyses the views of up to 1,000 business members to inform each quarterly report and quarterly economic forecast.

Confidence has been held back by political and economic uncertainties: the prospect of a highly unpredictable general election, weak growth (and a possible Grexit) in the Eurozone, the UK’s future relationship with the EU and continuing unrest in Ukraine and the Middle East. Although this quarter’s fall is more pronounced than in previous quarters, it is still firmly in positive territory. 

Key issues emerging from the BCM this quarter 

The latest results point to a year of relatively stable growth conditions for 2015, with sales supported by domestic spending and rising consumer incomes in real terms, rather than by foreign demand. 

  • Turnover and profit growth are expected to remain steady over the coming year. Latest GDP estimates for 2015 show growth of 2.6% which is lower than our previous estimate of 3.2%. Much of the difference can be explained by a weaker final quarter which showed the slowest growth since Q4 2013. The falling price of global commodities such as oil is being felt, as businesses expect input price growth to slow. This trend will support business bottom lines and provide a boost to consumer spending power. 
  • Employment growth also looks to have peaked, with slower increases in headcount over the next year than the past 12 months. Businesses have kept salary growth on hold this quarter at 2.2%. This is unchanged from the previous two quarters and expected to remain broadly at this level for the coming year. However, with inflation reaching ever lower, employees are now seeing an increase in spending power and are likely to contribute strongly to economic growth during 2015. The effects of a tightening labour market are being felt, as skills shortages and levels of staff turnover are a concern for a rising share of businesses. 
  • The trend of continued growth, alongside further reductions in spare capacity, would ordinarily provide strong evidence for the Bank of England to start raising interest rates. However, with the risk that consumer price inflation dips into negative territory this year on the back of falling oil prices, it now looks likely that monetary policy will remain on hold until late 2015 or early 2016.

What our members are saying 

To complement the BCM, ICAEW Regional Directors have gathered anecdotal feedback – much of it also on the subject of UK economic growth – from meetings over the past couple of months with our members.  

While confidence is down on a year ago in virtually every UK region, with declines also seen quarter on quarter in many areas, it is not a uniform pattern. Businesses in Scotland show least confidence and the South East, South West, East of England and London have all seen confidence generally decline steadily over the past four quarters.  

In contrast to these trends, the northern regions of Northern England and Yorkshire and Humber have seen their confidence levels hold steady this quarter, at a higher level than that seen in the south. One aspect that may be helping to keep confidence in the north more buoyant is recent trade performance.  

1. Trade performance

  • ‘We’ve had a couple of tough years. The luxury end of the car business was OK, but the other marques, which depend, for instance, on builders buying new trucks, was down and is only just starting to pick up – when money’s tight you don’t buy a new vehicle, you service the old one for another year. But at the moment we’re ahead of target for the first time in two years’, finance director, car dealership group, South Yorkshire.
  • ‘Clients with international business operations are doing very well. Those who sell within the UK but outside this region are doing fine. The ones giving us cause for concern are those dependant on the local economy; something like 60% of local employment is with the public sector – hospitals, universities and local government – and those areas are all depressed and their jobs uncertain’, two-partner practice, South Yorkshire.
  • ‘We see underlying business improving. We are winning good work but unravelling what was signed up in recession and resolving associated issues is time/resource consuming for us. Seems to be typical across our sector. We are trying to close down anything in the former Russian states.  Getting out is a real nightmare and we can’t make money successfully there. Political risk as well’, finance director, utilities sector, South West.

2. The general election

Uncertainty over who will form the next government means uncertainty over how business-friendly it will be and whether the UK has a long-term future in Europe. 

  • ‘Private equity investors in the healthcare sector are pausing to see what happens in the General Election. If the Labour party form the next Government, private healthcare will shrink and so will equity deals in that sector’, finance director, financial services sector, Thames Valley. 
  • ‘The political focus on the low-paid sector and the General Election are bound to increase pressure on business. We are experiencing on-going wage-increase pressure for above-inflation rises and downward pressure on prices. Business is picking up but not enough to raise prices’, finance director, South West. 
  • ‘The Education sector is feeling nervous about the future and expects more austerity measures after the election no matter which party forms the next Government.  Investment is needed to build the UK but this is not happening. There is a concern that the level of service will reduce even further in the public sector’, deputy director of finance, university sector, Thames Valley. 
  • ‘We must stay in the EU. It makes no sense to disengage from our major market and it is fanciful to think we can just pull up the drawbridge and walk away with no economic consequence’, finance director, manufacturing business, North West.

3. Staff turnover and competition 

Staffing is possibly the most consistently reported issue for business across sectors and regions. Although each may have a different reason for concern in detail, the big picture is clear: business needs more skilled workers.  

  • ‘I’ve a friend who’s a specialist recruiter in the financial sector. He doesn’t have enough qualified chartered accountants on his books to fill the vacancies that are going around’, finance director, marketing agency, South Yorkshire. 
  • ‘If policy on immigration is tightened significantly there will be an adverse effect on agriculture, particularly the salad vegetable industry’, adviser to agricultural businesses, East of England. 
  • ‘We hire immigrants from Europe. They are grateful, motivated and educated’, finance director, East Midlands. 
  • ‘Bricklayers are walking off site for more money elsewhere. 100,000 engineers are needed in the UK but only 30,000 are studying physics which is a pre-requisite for engineering’, finance director, natural resources engineering plc, Thames Valley. 
  • ‘We only make 5% margin, so there is not much room to pay our skilled workers more’, finance director, natural resources engineering plc, Thames Valley. 
  • ‘UK has the lowest rate of girls doing engineering’, finance director, natural resources engineering plc, Thames Valley. 
  • ‘House prices in the South East deter people from re-locating to the area’, Guildford based accountant.

4. The global crude oil market 

This quarter, confidence fell across the main industry groupings of production, construction and services. In one sub-sector – Energy, Water and Mining – the reading even dropped into negative territory for the first time since 2009. That, and the fact that Scotland recorded the lowest confidence, well down from  the same point the previous year, is likely to be a result of the significant price declines seen in the global crude oil markets. 

  • ‘We’ve a couple of clients who were doing very well until about six months ago. They’re tied into the oil industry. Orders are being delayed as the price falls, or there are Stops put on orders while stocks of consumables are run down’, large accountancy firm, South Yorkshire. 
  • ‘The oil industry is in crisis and business development needs care and attention. Our foreign (former Russian state) contracts are going OK and we are ramping up to take advantage of opportunities there and related to UK power station (Hinkley Point) developments with an eye to future potential. We expect to double turnover at worst in 2015’, managing director, utilities sector contract specialist, South West.

Outside the sector, however, some see the benefits from a lower oil price. 

  • ‘This has happened before in 1986, when the oil price fell to $12 a barrel. Oil prices will come back’, director, SME strategic planning, Thames Valley. 
  • ‘Oil prices falling puts more money in pockets which expands the economy’, director, financial technology consultancy, Thames Valley. 
  • ‘As a small energy supplier there may be some benefits to factoring in a price freeze; there may be an opening up of how energy companies buy oil which would be a positive’, finance director, energy sector, Thames Valley.

5. The challenge of accessing finance and red tape 

  • ‘The banks seem to chop and change. Some lend but some pull out. Clients generally don’t want to be into the banks more than they can help, so they’re keeping money in the business and only growing organically. It slows down investment and the pace of growth’, large accountancy firm, South Yorkshire. 
  • ‘We’re advising clients not to keep all their financial eggs in one basket. Too many have an overdraft, a stock loan, a property loan and invoice factoring. At the first hiccup the bank calls in a reporting accountant, and the accountant’s fees cause a cash-flow problem that brings the whole lot crashing down. The Government-owned banks are especially jittery. So if you can, factor with someone other than your bank’, insolvency practitioner, South Yorkshire. 
  • ‘SMEs are still finding it hard to raise finance; the banks are being choosy who they lend to. The banks are very risk averse, looking backwards rather than forwards. The lending community are looking at the P and L for the last three years rather than the balance sheet’, interim manager, leisure industry, Thames Valley. 
  • ‘The conventional banks are more averse to risk. IT businesses are having more success at other banks’, finance director, technology sector, Thames Valley. 
  • ‘Getting an overdraft with a bank is very difficult. Banks only want to lend to good risk. Equity funders are better at judging risk’, director, owner-managed business, Thames Valley. 
  • ‘The automatic enrolment issue is the big cloud on the horizon. We are concerned that scheme is not run properly. It represents an additional tax’, finance director, South West. 
  • ‘As a small business, we’re over-regulated in employment law and VAT. For instance, flexible working: there’s no problem with the law itself, but outsourcing the compliance advice comes to £500 or £1,000 a time and that’s a significant amount for us. Or, on top of a value-based EU sales return we now have to complete, an Intrastat return which declares the weight of all the products we’ve sold into EU countries’, finance director, small business, hardware/tech sector, South Yorkshire.

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