IBR

Latest findings from the IBR, Q3 2017

UK business confidence recedes as European and Global optimism remains buoyant

  • Q3 global business optimism stands at net 49% - a slight (2pp) drop from previous quarter’s record high
  • UK business optimism falls to its lowest measure since Q1 2013, down to 9%; whilst optimism remains strong across the EU and eurozone (net 47% and 57% respectively)

New figures from Grant Thornton’s International Business Report (IBR) show a growing divergence in business optimism between UK firms and those of EU and other major economies around the world. Whereas business confidence in the eurozone remains high, growing uncertainty has hit UK business optimism hard. The data is revealed as negotiations around Brexit have become increasingly protracted and the UK seeks to extend its timetable for exiting the European Union (EU) via a transitional deal.

Globally, the overall position for business optimism remains relatively high at +49% in Q3 of 2017. This is down 2pp on Q2’s record high, and follows five consecutive quarterly increases in business sentiment globally. The outlook for businesses in the eurozone continues to be positive. Optimism stands at net 57%, just down from 58% in Q2, which was the highest IBR figure ever recorded for the region and comes as GDP growth in the region hit its fastest pace since 2011 in Q3.

Figures for the UK’s business confidence come in stark contrast to their continental counterparts. Optimism among businesses leaders in the UK stands at its lowest since Q1 2013, with a 13pp fall to 9%. Despite this continued deterioration, expectations for revenue remain buoyant (up 3pp to 52%) and businesses are also confident that selling prices for their goods and services can rise in the next 12 months (up from 32% in Q2 to 45%). Alongside export expectations at a near two-year high of 23%, many underlying indicators reported by UK businesses remain strong. Moreover, positive GDP growth and the availability of funding in the capital and private equity markets remain solid features of the economy.

Robert Hannah, chief operating officer at Grant Thornton UK LLP, comments: “Whilst the eurozone is starting to motor ahead, businesses in the UK are feeling somewhat hamstrung at the moment. The number of ‘unknowns’ still surrounding our future relationship with the EU, coupled with inflationary and import cost pressures beginning to materially bite into profitability, are rattling UK business confidence.

“Policy makers have given rise to an unsettled period for business leaders in the UK, as Brexit negotiations are moving slowly and have become protracted. The result is that confidence has dipped while businesses are stuck in a period of ‘wait and see’. Fundamentally, however, British businesses report that they are in good shape, with companies upbeat on revenues and export expectations. Once policy makers show their hand and can give a better sense of the trading environment ahead, businesses are well positioned for growth. The question for the UK economy is: How long will they have to wait?”  

The IBR figures come as the Bank of England’s Monetary Policy Committee has confirmed its intention to raise interest rates for the first time in over 10 years, to 0.5%.

Robert Hannah continued: “The long-anticipated interest rate rise offers businesses a degree of certainty over their borrowing costs and investments in the near term. Whilst the modest rate increase in and of itself is unlikely to prove inhibitive for businesses and may actually spur investment as firms look to get ahead of future rate rises, they’ll be reading the Bank’s cautious outlook on weaker economic growth and higher inflation with interest. This could further erode business confidence in the months to come, particularly if clarity on Brexit proceedings doesn’t come soon.

“What businesses need most is a more tangible indication from the Government as to where Brexit negotiations are headed. As this is unlikely to materialise in the near term, businesses should be making preparations for Brexit, including a ‘no-deal Brexit’ scenario, and building positive contingencies within that to mitigate risks and identify opportunities. A focus on their export strategies, talent retention and attraction initiatives, and operational / supply chain exposures is a prudent place to start with planning. Those businesses taking more proactive steps in gearing themselves up for a post-Brexit UK economy undoubtedly stand to gain the most on Day 1 Brexit, whatever that may look like.”