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Business confidence dips for the first time in two years

Businesses are more realistic about prospects over the next year as confidence drops for the first time in two years, but still remains close to an all-time high.  The latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) also indicates a modest slowdown in economic growth later on in 2014, with skills shortages becoming a greater challenge to more companies.  

Key findings for Q3 2014 show:

  • The BCM Confidence Index stands at +32.3 this quarter compared to +37.3  in Q2 2014 – the first decline in two years
  • The UK economy is expected to expand by 0.9.% in Q3 2014 but the pace of growth may slowdown in the final quarter of  this year
  • Growth in employment shows no signs of slowing but salary levels remain muted and getting the right skills is becoming a bigger challenge for an increasing number of businesses

Stephen Ibbotson, Director of Business at ICAEW, said:

“This slight fall in confidence, the first for two years, demonstrates that businesses are becoming more realistic about the future. The imbalances in our economic recovery that were masked by rising confidence continue to persist – our exports remain weak, and investment isn’t maintaining momentum. We look to the Bank of England and the government to work harder to ensure that the recovery is placed on a broader footing before we see this still relatively high optimism erode away.”

Scott Barnes, CEO of Grant Thornton UK LLP, added:

"Whilst the last quarter reveals there has been a dip, business confidence remains very positive, with growth still relatively strong and the private sector looking to create thousands of jobs. Business is however anticipating a slight slowdown in investment, and sourcing the relevant skills has become  a greater challenge for some, particularly in construction. As the labour market continues to improve, and staff turnover increases, it is important that we ensure that those entering the workforce are adequately equipped with the skills needed to take the economy forward."

Slowdown in economic growth

While economic growth is expected to be 0.9% for Q3 2014, turnover and profit growth expectations are levelling off. This indicates that the rate of growth may slow down later on in the year. Business investment is also expected to slow. The share of businesses operating below capacity continues to fall back. Capacity has become a key indicator for the Bank of England, and this paves the way for the Bank to raise interest rates in early 2015.

Job creation to continue

Employment prospects continue to improve, with an increase of 2.5% expected in employee numbers over the next year. This equals over half a million new jobs in the private sector with large private companies taking on the most new staff, followed by SMEs. Salary growth, though modest, is also expected to be above inflation in the next 12 months. As unemployment falls back finding workers with management and non-management skills is becoming a greater challenge. Skills shortages are most acute in the construction, utilities and IT sectors.

Domestic sales dominate

Domestic sales rather than exports remain the main driver of growth, reflecting the fact that the UK economy is growing more strongly than its key export markets. The continued weakness of exports means that the UK’s trade position could impact on growth. However, the reliance on domestic demand has led firms to take on more staff and even increase training, with construction and business services most optimistic on sales.