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Clarity on Europe essential for future business investment, says ICAEW and Grant Thornton

The protracted General Election campaign created uncertainty that led to businesses holding fire on their investment and growth plans, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM). Business confidence is flat this quarter, as the survey suggests turnover and profit growth over the next 12 months will be weaker than the past year.

Key findings for Q2 2015:

  • The BCM Confidence Index stands at +16.2, down marginally from +16.8 – showing that outlook has stabilised in positive territory following falls in the last few quarters
  • This is potentially underpinned by a slowdown in input price growth, which slowed sharply over the last quarter and is expected to do so in the next year
  • Turnover and profit growth are down from last quarter, and businesses expect them to weaken over the next 12 months – the first time businesses have felt less positive about their profitability since before the financial crisis
  • Employee salary growth is continuing to outstrip inflation, but only because inflation remains low, not due to any major increase in pay packets
  • Exports continue to weaken, as the gap widens between it and domestic demand, making the recovery even more unbalanced and creating concerns over its sustainability
  • Spare capacity has increased in the manufacturing sector, while it also struggles with access to a skilled workforce

Michael Izza, ICAEW Chief Executive, said:

“The prolonged period of political and economic uncertainty has clearly had a material impact on business confidence in the last few months with investment, hiring, wage increases and exports all being on pause. With a clear majority, the incoming Government now has to move quickly to get the UK economy moving forward again.

“The first priority should be to grow our exports. The UK desperately needs to rebalance the economy. As the BCM reveals, the gap between our exports and domestic demand is widening even more. While growth built on domestic demand is fine for the moment, soon the benefits of low inflation and cheaper petrol will evaporate. It is crucial that we look to boost our exports both inside and outside the EU. Businesses need to think global from the start, and we need to make it easier for them to trade internationally.

“The second priority is the UK’s relationship with Europe. There is an increasing urgency to negotiating reform and holding a referendum. The risk is that, for the next two years, the UK is effectively closed to inward investment from countries within and outside the European Union. That’s why the Prime Minister must agree a package of reforms without delay and put that to the British people in a referendum as soon as is practically possible.”

Sacha Romanovitch, CEO-elect of Grant Thornton UK LLP, added:

“The new government has the opportunity to refocus its efforts on making British business the powerhouse it can be. To do so, it needs to engage with business and ensure the voice of its critical mid-market companies is heard loud and clear, and develop a policy framework aimed at supporting its growth. This must include help in exporting and talent generation - areas we know British businesses want the Government’s support with and which could unlock significant potential across the economy.

“The strength of the economic recovery largely depends on rebalancing the trade deficit, ensuring British businesses are getting the help they need in new markets abroad, and also sending clear signals to the international community that Britain is ‘open for business’, a dynamic place to invest in. Businesses at home and abroad tell us that they are concerned about a potential ‘Brexit’, particularly around talent flows and a captive market that still accounts for half of our export trade. 

“A priority for the government must be to negotiate a package of reforms to our relationship with the EU to bring to the country. While it’s understandable that business confidence has stagnated given the run up to the election, now that is concluded we would hope that with clear action on Europe, skills and reducing regulation that business confidence will again improve.”

Business plans on pause due to fragile environment

Business investment has slowed due to the continued fragility about the economic outlook at home and abroad. This is impacting on turnover and profit expectations. Spare capacity continues to be a feature of the economy, and hiring and investment intentions have slowed while there is still capacity to use.

Gap widens between exports and domestic demand 

A combination of a strong pound and an uncertain Eurozone has contributed to relatively sluggish export growth. This is most prevalent in the construction and property sectors. However low inflation, low interest rates, and above-inflation wage increases mean that households will feel the benefit in their pocket, driving domestic demand above exports. 

Construction providing boost for economy 

The construction sector appears to be feeling buoyant about its prospects, hiring at a rapid pace and decreasing its spare capacity compared with a year ago. It is one of the most confident sectors of the economy, compensating for the energy sector, which is struggling with a fall in turnover resulting from oil prices.