Business confidence

Business confidence drops as uncertainty prevails

The latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) has fallen to just above zero as businesses react to the current economic and political uncertainty. Now at its lowest point in four years, the survey will be uncomfortable reading for UK plc as the economic growth slows further and issues such as the EU referendum and slackening Chinese growth undermine confidence. 

Key findings for Q2 2016: 

  • The BCM Confidence Index is only just in positive territory and stands at +0.8, down from +11.4 last quarter and continuing the downward trend of the last two years
  • Export sales have improved due to the exchange rate and growth in the Eurozone but domestic sales growth has slowed significantly
  • The decline in confidence points to only modest growth in GDP in Q2 2016, at 0.3%
  • Skills shortages and staff turnover problems are less of a challenge than 12 months ago while employment is expected to slow over the coming year
  • The drop in confidence applies across companies regardless of ownership, size or sector 

Michael Izza, ICAEW Chief Executive, said: 

“Business confidence is fragile and there is an absence of resilience in the UK economy at the moment. A combination of factors has led to this negativity and includes the EU Referendum, slowing domestic sales, Chinese growth slackening and the recent Budget. Businesses cannot plan with confidence and this applies regardless of sector, ownership or size of company. Weakening growth will also mean lower tax receipts for the Chancellor making it even harder for him to meet his deficit goal. The next quarter could be decisive in terms of a return to trend for growth and the economy going forward.” 

Robert Hannah, Chief Operating Officer at Grant Thornton UK LLP, added: 

“The interplay of a variety of pressures – in both domestic and international markets – are beginning to rattle business leaders’ nerves. However, the drop in confidence is somewhat ironic, given that the fundamentals of the UK economy are actually quite strong as interest rates, inflation and unemployment remain relatively low, our banks remain well capitalised and corporations maintain high cash balances. Sales growth has stabilised but at a slower rate than the previous two years and as a result profits growth remains slow. Businesses are unable to raise prices by much but have had added pressure on costs with auto-enrolment and the National Living Wage. It is not surprising therefore that some companies are reticent to make significant growth investments at the moment.  Short term management of costs could have a significant long term impact on future growth and dynamic, growth-orientated firms will be making the right investments now to capitalise when growth returns, both at home and abroad.” 

Confidence declines across all sectors 

The financial services and property sector’s confidence indices have now moved to negative territory while business service’s confidence is weak. Construction and IT & Communications expect the strongest growth in sales, employment and pay. The Manufacturing sector also expects reasonable sales gains, while the Financial sector expects to increase pay particularly slowly.  

Employment and salary increases expected to slow 

Employers are exercising restraint on employment and pay as their profit growth remains slow. Companies expect to increase employment by less than 2% in the next 12 months, while skill shortages and staff turnover problems are becoming less of a challenge than a year ago. Salaries are also only predicted to rise by 2% over the next year. Therefore slowing employment and low inflation is expected to continue for the foreseeable future despite some wage uplift due to the recent increase in the National Living Wage. 

Negative confidence in London, Scotland and Wales 

Confidence indices in London, Scotland, Wales and the East Midlands region are now in negative territory. The remaining regions have all seen confidence fall with the exception of Northern England and Yorkshire & Humber who saw sharp falls the previous quarter.