ICAEW Business Confidence Monitor (BCM): London
Q1 2020: Business confidence in London remains negative
Business confidence among companies in London has improved but is still in negative territory. Companies report slower rises in sales and profits compared to the year before, as well as growing concerns over marketplace competition and customer demand. In turn, businesses are restricting employment growth and their investment rates are muted. However, they project improvements in sales and profits growth for the year ahead.
Business Confidence in London
Like elsewhere in the UK, London’s Business Confidence Index has improved in Q1 2020. However, at -2.0, it still remains below zero, and lags the historical average for the capital. Businesses in London’s large services sector are likely to still be concerned about the uncertainty surrounding the specifics of the UK-EU trade negotiations.
Domestic sales, exports and employment growth
Businesses are seeing an easing of domestic sales growth in the year to Q1 2020, at 2.2% compared to 2.6% a year ago. And exports growth of 2.3% is marginally down on the 2.5% expansion in the 12 months to Q1 2019.
In response to slowing sales growth, businesses are limiting their increases in employment to just 0.6% in Q1 2020 year on year, one of the slowest rates across the UK. This is also the weakest rise in headcounts for London-based companies since Q4 2012.
Weak sales growth is reflected in more widespread challenges relating to competition and market demand. 40% of companies report marketplace competition as a growing concern in the year to Q1 2020, up from 36% in the year to Q1 2019. And customer demand is also a growing source of difficulty, for 39% of London-based businesses, compared with 31% in the preceding 12 months. Regulatory requirements remain the most widespread challenge for businesses, although the proportion of companies citing rising concern over these in the year to Q1 2020 is down to 47%, in comparison to 56% in the previous year.
Selling and input prices, and profits growth
Largely as a result of unspectacular sales performance, companies are struggling to achieve substantial rises in prices charged to customers. These are up by 0.5% year on year in Q1 2020 and continue to lag input price inflation, which stands at 2.1% in the year to Q1 2020. The net effect of increasing costs and easing sales rises is slower profits growth which, at 1.5%, is the joint weakest pace seen by London businesses since Q2 2010.
Reflecting this difficult sales and profits environment, investment rates are restrained. Growth in both capital investment (1.4% year on year) and Research & Development (R&D) spending (1.9%) are below their respective national averages, with growth in the former exhibiting a notable downwards trend over recent quarters.
Prospects for the next 12 months
Despite current difficulties companies anticipate improvements in domestic sales and exports growth in the year ahead, with expected increases of 3.6% and 3.1%. In the year to Q1 2021, businesses also foresee an acceleration in profits growth, to 4.0%. However, expectations for investment are mixed. While capital investment growth is set to pick up slightly to 2.3%, companies plan to moderate R&D growth to 1.5% in the year to Q1 2021.