UK Business Confidence Monitor Q2 2016

Transcription

1 UK Business Confidence Monitor 216 BUSINESS WITH CONFIDENCE icaew.com/bcm

2 216 Overall confidence +.8 Domestic sales Profit growth drops sharply continue to slow declines further Key points Confidence remains on the downward trend of the last two years, with the index barely positive this quarter. Domestic sales growth continues to ease, while export growth starts to improve. As a result, turnover growth stabilises but at a slower pace than a year ago. With weaker turnover growth, profit growth declines further as businesses are only able to achieve modest growth in the prices they charge. Implications The significant decline in confidence to the lowest level since 211 is no doubt impacted by a number of factors including Brexit. Regardless of the arguments for remaining or leaving, the uncertainty it creates is an obvious trigger for a big downturn in confidence which affects business investment and hiring decisions. While both sides are struggling to articulate what the future could look like, business is worried and doesn t know what it could end up with on 24 June. Whichever way the vote goes, doubt is likely to continue with a corresponding impact on confidence. Elsewhere, profit warnings at UK listed companies are at their highest level since the financial crisis, and banking is having a tough year so far both of which are having an impact on the capital. A lot of the recent residential construction in London has been aimed at overseas buyers, but they are holding off due to uncertainty at home and a less favourable tax regime in the UK. 2 icaew.com/bcm

3 Capital investment growth Employment growth Service sector weak softens slightly falls Key points Capital investment and R&D growth remains sluggish due to uncertainty in the wider economy and lower profit growth. Employment growth is lower than a year ago, and is expected to soften further, while salary growth stays broadly in line with the last year. Confidence in the Service and Construction sectors has fallen sharply this quarter; into line with the Production sector. Implications The rest of the Service sector will also be considering the impact of the increased national living wage. While small and medium-sized companies have been the most vocal about the effects of the national living wage and auto enrolment, there is increasing evidence that larger companies are feeling the pinch too. The weakness of sterling continues to help exporters, despite unfavourable economic conditions and political uncertainty in Europe and some BRIC countries. Recently, however, sterling has started to strengthen which could halt this trend. icaew.com/bcm 3

4 Business confidence in 216 Fig. 1 Trend of UK business confidence RECESSION Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q % more confident 4% as confident 29% less confident compared to the last 12 months Confidence falls sharply, as a result the index is barely positive The latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) shows a further decline in business confidence. The index is still positive, but only just, at.8, with almost as many businesses being less optimistic about economic conditions in the next 12 months as are more positive. Business leaders confidence about the economic outlook has now been declining, with barely any interruption, for two full years. This reflects in large part a gradual deterioration in UK economic performance; GDP growth slowed from 2.9% in 214 to 2.3% in 215. Although consumer spending was helped last year by very low inflation and continuing low interest rates, corporate investors remained cautious and net exports were hit by the strong currency and weakness in the global economy, not least the slowdown in the Chinese economy. While softening economic conditions are likely to be the major factor harming business confidence, two specific factors may have introduced extra uncertainty in the latest quarter. Firstly, the Chancellor s March Budget created various concerns. The Office for Budget Responsibility (OBR) revised down its growth forecasts and raised its borrowing projections, while concerns were raised about the possible impact of austerity measures on consumer spending, later this year. Secondly, the announcement of the date of the Brexit referendum brought that issue to the forefront, and by doing so increased uncertainty for many businesses. 4 icaew.com/bcm

5 Fig. 2 Forecast of quarterly GDP growth based on ICAEW Confidence Index % Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Quarter-on-quarter GDP growth Forecast of quarter-on-quarter GDP growth based on Confidence Index.4 % Q1 GDP actual growth.3 % GDP growth estimate 216 likely to see a further weakening in GDP growth, continuing a clear trend The Office for National Statistics (ONS) has recently published its preliminary GDP estimate for Q It shows an increase of.4% quarter on quarter, compared with.6% in the final three months of 215. We estimate a further slowdown to.3% growth in this year, largely reflecting the decline in business confidence. In the ONS estimate for Q1 216 the pattern across sectors remains relatively unchanged compared to the end of 215. Production contracted by.4% for the second quarter in succession and construction, while more volatile, has continued a downward trend apparent since mid-215. However, the industry with by far the biggest influence on overall GDP growth is the service sector. Although it is the only broad sector which has consistently expanded over the last few years, it has slowed from.8% quarter on quarter at the end of last year to.6% in the first three months of 216. This deceleration is attributable specifically to the business services and finance sectors which slowed from.7% to.3% and, to a lesser extent transport, storage & communications which slowed from 1.2% quarter on quarter in Q4 215 to 1% in Q The confidence reading for this year for the Service Industries shows that business sentiment in the sector is barely positive, while gains in turnover and profits are both slowing. Hence, as this industry accounts for the largest part of GDP, we expect overall growth to edge down to.3% in the second quarter of this year. icaew.com/bcm 5

6 Business financial performance Fig. 3 Turnover, domestic sales and exports average % change % Change Forecast Exports Domestic sales 3 2 Turnover Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q Weak growth in domestic demand but with some relief from exports Sales growth has continued at broadly the same rate in 216 as in Q1, 3.3% year on year, having slowed in the two previous quarters. The same is true for turnover. This is mainly driven by a weakening in domestic demand, whereas exports are starting to improve. Companies report that the gradual slowdown in domestic sales, apparent through the second half of 215, continued into the first and second quarters of this year. This trend is broadly consistent with ONS data. On the consumer front, retail sales growth has eased since peaking in the first half of last year, while output is in decline in production and construction, and easing in services. This trend across industries is likely to reflect both softening demand for consumer products and services, and also a slowdown in intra-business trade in intermediate products and services. The slowdown in domestic sales, to 3.4% year on year in this year, is clearly a concern as they accounted for much of the growth in the UK economy in 215. Fortunately, companies also report strengthening export sales, probably reflecting, at least in part, the weakening in sterling. With exports and domestic sales taken together, overall sales growth this quarter is very close to that in the first three months of the year, at 3.3%. This relative stabilisation suggests that, while there are background factors such as the Budget and the Brexit referendum impinging on business confidence, businesses nevertheless continue to experience an increase in sales but only at an historically low pace. 6 icaew.com/bcm

7 Fig. 4 Employment average % change % Change 6 5 Forecast Employment Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q Employment growth weaker than in 215 Slow growth in sales and turnover is translating into weaker increases in employment something that employers expect to continue. Companies also report modest declines in skill shortages and in staff turnover. The period since 212 has, for the most part, seen sustained job creation, as companies have sought to meet increases in orders and sales by expanding their workforces. However, as sales growth has eased, so too has the rate of increase in employment, falling from 2.5% year on year in Q3 215 to just 1.7% in 216. With employment growth slowing down, the latest quarter shows small falls, to around a fifth, in the percentages of companies citing the availability of both management and non-management skills as matters of growing concern for their businesses. Consistent with that, fewer companies identify staff turnover as a rising challenge, for the second quarter in a row. These movements are possibly being reinforced by an increased pool of available labour. Data from the ONS indicate that the percentage of working-age people who are either in work or seeking work rose to 78.3% in the three months to February 216, from 77.9% a year earlier. Looking forward, employers expect their workforces to continue growing, though at a slower rate of 1.6%, reflecting their caution over future gains in sales and turnover and probably in profits too. icaew.com/bcm 7

8 Fig. 5 Salary, input prices and consumer price growth (CPI) average % change % Change 6 CPI inflation Forecast Total salary Input prices Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q Businesses exercising restraint over pay Input prices and pay are rising slowly, but not as slowly as the prices that companies charge their customers. Companies input prices are rising only slowly, partly because weak growth in demand is holding them back, but also because the falls in oil and commodity prices seen last year are clearly having an important additional effect, tending to hold down costs. The increase in the year to 216 for input prices is just.9%, while firms anticipate increases of 1.2% over the coming 12 months. Meanwhile, companies are being restrained over pay, reflecting both the weakness of their sales growth and low inflation. They report that total salary costs rose by just 2.1% in the year to this quarter, with a similar increase expected for the year ahead. One factor that may not be fully incorporated into companies expectations for pay increases is the introduction of the National Living Wage (NLW) this April. Just under three million people will be directly affected, but the OBR predicts that slightly more than that will experience wage spillovers, as firms seek to maintain pay differentials. While the rises in input prices and labour costs are clearly modest, there must be some concern that they are not being matched by the prices that companies charge their customers. These have slowed from 1% year on year in the first half of 215 to just.4% this quarter, reflecting tough market conditions. This is impacting on profit growth. 8 icaew.com/bcm

9 Fig. 6 Profit and selling prices average % change % Change Forecast Profit Selling prices Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q Profit growth continues to slow as selling prices growth remains weak With selling prices rising more slowly than costs, whether labour or non-labour, companies are experiencing downwards pressure on profit. Despite this, spare capacity continues to diminish. Companies report only 3.1% annual growth in profit in this quarter, so weaker than in 214 and 215, and reflecting in significant part the tendency for their selling prices to rise more slowly than their input prices and labour costs. One factor influencing profit growth is sluggishness in productivity gains. The ONS estimates that output per hour was just.5% higher in the final three months of 215 than a year previously, with services up 1.1% but manufacturing down 3.4%. In contrast, although rises in unit labour costs were low by historical standards, they nevertheless grew by more than double the rate of productivity, up by 1.3% over the same period. On the favourable side, the amount of spare capacity reported by firms has been on a mainly downward trend since 212, reflecting the gradual expansion in the economy after the difficulties of 212, when the euro crisis hit hard. This will have been helpful for profitability, but in Q1 this year there was a worrying increase in this indicator, and hence a deviation from the trend. Fortunately the more recent data suggest that the underlying pattern has reasserted itself, with 49% of firms reporting that they are operating below capacity, down from a peak of 62% in Q icaew.com/bcm 9

10 Fig. 7 Investment average % change % Change Forecast R&D Capital investment Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q Investment intentions weaker than in 214 and 215 Weak growth in profit is impacting on investment plans, although the slowdown in overall demand and background uncertainties are likely to be factors too. Total capital spending, research and development (R&D) and staff development are all affected. Profit growth has eased from 4.9% year on year in 215 to 3.1% in the current quarter. This, along with the broader economic slowdown and uncertainties such as Brexit and the possible impact of further austerity policies on consumer spending, is likely to be a reason why companies are being cautious about investment. Capital spending in the current quarter is 2.3% higher than a year earlier. That is the same increase as reported in the first quarter of 216 but well below the increases reported throughout 214 and 215. Forecasts for R&D growth are, if anything, even weaker than those for capital spending overall. Expenditure on R&D has risen by around 2%, year on year, for four quarters in a row, while planned spending has consistently been slightly lower than that (with the gap likely to reflect a tendency for budgets to be slightly overspent, on average). The expansion of staff development budgets has also moderated, to just 1.5% this quarter, its weakest increase in over two years, reflecting companies need to restrain cost increases. Firms intentions for the year ahead have not deviated much from 1.5% to 2% over the last three years, and this remains the case for the latest quarter, with staff development budgets for the next 12 months predicted to increase by an average of 1.7%. 1 icaew.com/bcm

11 Trends in business confidence INDUSTRY Fig. 8 Trend of business confidence by industry 215 Q3 215 Q4 215 Q UK AVERAGE All Production Industries Energy, Water & Mining Manufacturing & Engineering Construction All Service Industries Retail & Wholesale Transport & Storage IT & Comms. Banking, Finance & Insurance Property Business Services Construction & Services confidence weakens, coming into line with Production The overall fall in confidence reflects Construction and especially the Service sectors moving into line with the Production Industries. Banking, Finance & Insurance, Property and Business Services had the steepest declines, with Brexit concerns perhaps adding to underlying issues with economic growth. While this is the first time since 212 that overall confidence has been close to zero, the Production Industries have been in that position since the middle of last year, partly because of large declines in confidence in the Energy, Water & Mining sector, reflecting in turn the problems created by lower oil prices. What has changed is that Construction and, more notably, the Services Industries have now come into line, both dropping around 13 points to 7.4 and.5 for Construction and Services respectively. In particular, businesses in the Banking, Finance & Insurance sector and Property sector are no longer optimistic about economic prospects, while Business Services companies are only very marginally positive (1.8). These sectors have seen their output growth slow according to the ONS data. They are also likely to be particularly concerned about Brexit, given that they export heavily to the EU, and/or they are heavily dependent on inward investment from there. The sector in which confidence has held up the best is IT & Communications where the index is at 1.1 in 216. This reflects the sector having much stronger expectations for sales growth over the next 12 months than any other industry, as well as optimism for exports. icaew.com/bcm 11

12 Trends in business confidence REGION Fig. 9 Trend of business confidence by region 215 Q3 215 Q4 215 Q UK AVERAGE England London South East (excl London) South West East of England East Midlands West Midlands North West Northern England Yorks & Humber Scotland Wales Confidence weaker across most regions, particularly London, Scotland and Wales The decline in confidence is most apparent in London and Scotland, probably reflecting the importance of financial services in both regions and, in the case of Scotland, oil. Confidence is also depressed in Wales, perhaps as a result of the recent steel industry announcements. The confidence index is now in negative territory in London (-5.3), which is likely to be related to the decline in sentiment in the Banking, Finance & Insurance, Property and Business Services sectors. The same sectoral pattern is likely to explain why confidence in Scotland is also negative (-7), but with the additional impact of difficulties generated by low oil prices. Confidence in Wales is also depressed after a sharp decline, and in this case the news about steel industry closures is likely to have had an impact, reflecting the number of jobs at risk and the likely knock-on impacts that the possible closure of the Port Talbot steel works could have on the wider Welsh economy. On the positive side, capital investment growth was the strongest of any region in 216, possibly attributable, at least in part, to the good news about automotive assembly work in Wales, with both TVR and Aston Martin announcing plans for new assembly operations. 12 icaew.com/bcm

13 Trends in business confidence TYPE Fig. 1 Trend of business confidence by company type 215 Q3 215 Q4 215 Q UK Confidence Index All UK Listed FTSE 35 All Private Companies Private Companies Large Private Companies SME Confidence declines across companies regardless of size or ownership structure The decline in confidence is widely spread and not confined to a particular size or type of ownership. The private company confidence index remained marginally positive at 2.5, while for all UK listed firms it slipped to -3.2 in 216. The weakness in business confidence in 216 is broad based and apparent across different ownership structures of companies and different sizes. Small and medium-sized enterprises (SMEs) report a slight increase, compared to the previous quarter, in the rate of sales growth, with both domestic and export sales contributing to the rise. Nevertheless the rate of expansion at 4.1% is still lower than through much of 215 which was well above 5%. Employment growth is also strong, no doubt in response to the slightly improved sales performance, but SMEs are keeping tight control on their capital spending. The increase in capital spending is 2.1% year on year so just half the rise in turnover this quarter at 4.2%. In contrast, FTSE 35 companies report the same growth in sales this quarter at 2.8%, as in the previous quarter but down from 4.6% a year ago, with neither domestic nor export business producing any uplift in performance. However, capital investment is stronger this quarter, continuing a trend already in place. The 2.5% increase in capital spending, year on year, is below the 3.4% rise in turnover in the same period, but the gap is less marked than for SMEs, which may be indicative of stronger underlying finances for the large, quoted company sector. icaew.com/bcm 13

14 About BCM BCM is one of the largest and most comprehensive quarterly reviews of UK business confidence and provides a regular snapshot of the economy, informed by senior business professionals running all types of businesses across the UK. It is shared with a range of national and regional policymakers, the business community, academics and researchers. It is a credible predictor of GDP and economic change and supports policy decision-making. The report is based on a continuous research programme of approximately 4, telephone interviews each year with ICAEW members working in industry and commerce. This probes opinions on past performance and future prospects for members businesses, and investigates perceived changes in the impact of factors such as availability of skills, government regulation and the tax regime. Data are weighted to represent the UK economy by value. For further technical details please see: BCM Technical Appendix at icaew.com/bcm Business Confidence Index methodology The Business Confidence Index is calculated from the responses to the following: Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months? A score was applied to each response as shown on the right, and an average score calculated. Using this method, a Confidence Index of +1 would indicate that all survey respondents were much more confident about future prospects, while -1 would indicate that all survey respondents were much less confident about future prospects. Further technical details on the design of the survey are available upon request. Variable Score Much more confident +1 Slightly more confident +5 As confident Slightly less confident -5 Much less confident -1 Acknowledgments Oxford Economics Oxford Economics is one of the world s foremost advisory firms, providing analysis on 2 countries, 1 industries and 3, cities. Their analytical tools provide an unparalleled ability to forecast economic trends and their economic, social and business impact. Headquartered in Oxford, England, with regional centres in London, New York, and Singapore and offices around the world, they employ one of the world s largest teams of macroeconomists and thought leadership specialists. Kudos Research Interviewing and data analysis was undertaken by Kudos Research. Kudos Research specialises in premium quality, custom-tailored UK and international data collection, as well as data analysis and research advisory services. Kudos Research interviews customers, stakeholders, business leaders and opinion formers across the globe, online and by telephone, as well as recruiting them for focus groups and depth interviews. 14 icaew.com/bcm

15 Other quarterly reports from ICAEW UK Economic Forecast Produced with Oxford Economics, ICAEW s economic partner, this quarterly newsletter provides a forward-looking perspective on how the UK economy is going to develop over the next 12 months. Economic Insight South East Asia Middle East Greater China Africa These quarterly newsletters provide a unique perspective on the prospects for each region as a whole and for individual economies against the international economic background. icaew.com/economicinsight

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