Business confidence falls as pace of growth slows


Confidence among UK businesses has declined further as companies react to weaker global economic data.

Although still positive, the latest ICAEW/Grant Thornton UK Business Confidence Monitor reveals slower growth leading to a reduction in tax receipts for Treasury and a potential headache for the Chancellor ahead of next month’s Budget.

Whilst the Business Confidence Index is in positive territory standing at +11.4, it is down from +15.6 last quarter and lower than the high of +37.3 two years ago with the number of firms operating below capacity has risen and there are indications of a further deterioration in productivity with growth also expected to slow.

Exports, while currently very weak, are expected to improve due to a strengthening Eurozone and a weaker exchange rate with the Euro – which if realised, would be positive news for Government who have been championing companies to export more.

Businesses are very careful about how the manage costs and as a result, capital investment growth continues to slow.

Salaries are expected to rise by 2 per cent in 2016 continuing to contribute to consumer spending power due to low inflation, with skills shortages still a challenge but may have peaked.

Michael Izza, ICAEW Chief Executive, said: “Given recent global economic data, the fall in confidence is not a surprise. The increase in US interest rates by the Fed and the slowdown in China have both led to businesses becoming even more careful about how they manage costs.

Growth is expected to slow and will mean less income into Treasury. If that happens, the Chancellor simply won’t meet his deficit reduction target. It will become a three-parliament problem.

After a particularly bullish Autumn Statement, the Chancellor has had to row back on the immediate prospects for the UK economy. This presents new challenges for him and how he responds in next month’s Budget. Companies are feeling the pressure and now would not be a good time to increase costs on top of a ranch of regulatory changes

Robert Hannah, Chief Operating Officer at Grant Thornton UK LLP, added: “Confidence is often a self-fulfilling prophecy, and while confidence may have fallen back this last quarter, business is still relatively positive. Within the global arena, our findings show that alongside Ireland, UK optimism is the highest in Europe.

All this coupled with the current competitive exchange rate and the increased spare capacity within business provides a great opportunity for UK business to steal a march on other economies. To do this they need to turn their sights to exploiting the opportunities in overseas markets and invest in capital investment and R&D over the next 12 months.

We are also heartened by the recent news from Government that UKTI is being reorganised to strengthen its focus on exports and that all Government departments should be championing British business and have targets around exporting for their respective sectors.”

Export sales expected to grow

Future export sales are expected to grow in line with domestic sales, after a period of under-performance. The Eurozone economy is strengthening, oil prices are down and the pound has weakened against the Euro. This means that UK goods are cheaper for other European countries and exports are expected to pick up as a result. If this materialises, this would be a good news for Government which has a number of initiatives to encourage more businesses to export abroad.

Issue of skill shortages and staff turnover looked to have peaked

The availability of management and non-management skills remains a major challenge for businesses but looks to have peaked. Employment growth has slowed to below 2 per cent but firms expect this to improve in the year ahead as the UK heads towards full employment. Despite this businesses only expect salaries to increase by 2 per cent in 2016, similar to those reported in 2015.

Confidence in production sectors turns negative

Confidence has fallen across most sectors with the production sector falling into negative territory (-3.1). Services also fell but confidence in the construction sector flattened off. Transport and Storage and the IT & Communications sectors saw the highest falls in confidence from the same quarter a year ago. The decline in confidence is particularly marked across northern regions and London.