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Election boost to confidence but skills and investment issues remain

Business confidence has improved for the first time in a year, as the decisive General Election result provided certainty for the year ahead. However confidence is still well below the all-time high seen a year ago, and the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) suggests that chronic skills shortages and a fall in investment expectations are fostering increased uncertainties in the medium term.

Key findings for Q3 2015:

  • The BCM Confidence Index stands at +22.4, up from +16.2 last quarter – showing that outlook was boosted by the decisive election result. This has arrested the consecutive falls in business confidence, but is still below the level seen a year ago
  • There are still no signs from businesses to raise employee salaries, although the ‘lowflationary’ environment is boosting consumer spending power
  • Export growth picked up in the previous quarter, and businesses expect further improvements over the next year
  • A trend over the last year has shown businesses making short-term capital investment decisions, despite planning to invest less over the coming months
  • Spare capacity however has reached its lowest level since early 2008, which should provide a small boost to productivity – and signal that an interest rate rise could be drawing nearer
  • Skills shortages are becoming even more of an issue, with a lack of people with non-management skills more of an issue than at any time since before the financial crisis

Stephen Ibbotson, ICAEW Director of Business, said: 

“Businesses crave certainty, so it surprises no one to see an uptick in confidence following such a decisive result in the General Election. The Greek crisis aside, the eurozone has been performing reasonably well following the injection of QE, and businesses are feeling the benefit through their exports to the eurozone.

“The number of firms operating at capacity is increasing, which should improve productivity growth, but the production industries still have a large amount of slack to tighten. Infrastructure investments such as the rail upgrades have been delayed, which combined with a severe drought in suitably skilled workers means that it is going to be a long, long time before productivity growth is turbo-charged. We need rhetoric for major projects to turn into diggers on the ground.

“There is a crunch point looming for businesses – especially those new companies who have never experienced higher interest rates. A rate rise is expected at the turn of the year, and the living wage, apprentice levy and dividend tax changes announced in the Budget far outweigh the benefits from a corporation tax cut. We want capital investment to improve but the Annual Investment Allowance has been set at a lower level than companies are used too. The government needs to keep a watchful eye on how these measures affect businesses in the medium term.”

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

“The rebound in confidence is undoubtedly pegged to the rather surprising outcome of the General Election and the clarity this offered, at least in the short term, on the UK’s political outlook. That said, there’s still a number of unknowns facing UK businesses which must be navigated over the mid to longer term, particularly as regards exports, talent and investment. The reality is there’s a significant appetite and opportunity for British exports across new and established economies which isn’t being utilised. Capitalising on this would not only help offset fledgling domestic demand and generate more sustainable growth, but also offers a compelling response to solving the productivity puzzle and tightening the spare capacity gap. Turning this confidence into material results requires the reassurance and support from Government, acting as a beacon for businesses to make the necessary investments and decisions in order to maximise export opportunities and steer through the labyrinthine regulatory and often cultural challenges businesses face in new waters.

“Closer to home, questions still remain over the north/south divide.‎ Encouragingly there are pockets of regional diversification, such as the emergence of a strengthening services sector in Manchester. The traditional split of manufacturing in the North and a concentration of services in the south is beginning to rebalance with resurgence of manufacturing in areas such as London. Without a truly diversified and vibrant economy where growth isn’t focused in one geographic or commercial area, the UK may struggle to find superior new growth opportunities.”

Capital investment driven by short term decision-making

Despite business confidence creeping up, businesses are saying that they are reluctant to invest in plant and machinery over the next 12 months. For the last year however we have seen businesses invest more than they have said they expect to. It appears that while uncertainty over Greece and a possible Brexit mean companies are reluctant to plan to invest, they are more comfortable making short-term decisions to invest in plant and machinery.

Optimism rises in south east, rest of UK more subdued 

Business confidence rose sharply in London and the South East, largely as a result of the improving feeling in the financial services and banking sectors. The North West and Scotland have also shown improvements, but in Yorkshire and the North firms are more subdued, perhaps waiting for the talk over the Northern Powerhouse to translate into action.

Manufacturing sector sees sharp worsening of skills shortage 

Over a third of manufacturing firms (36%) are reporting that the availability of skilled staff is a greater challenge to their business than a year ago. Only the energy sector suggests that it is less of an issue. This is still a major problem despite employment growth remaining strong, suggesting that there needs to be more investment in training.