UK businesses are regaining some confidence despite concerns over the eurozone crisis and slow UK growth but risk losing out to global competitors if they fail to invest for future development, according to the latest Business in Britain report from Lloyds TSB Commercial
The twice yearly report, which canvasses the views of 1800 UK businesses shows, that confidence has edged up since January 2012 despite continuing tough economic challenges. However, confidence is still not back to levels witnessed in the preceding two years and some firms are holding back from making crucial decisions about their future as a result.
The Business in Britain confidence index tracks businesses’ views of likely sales, orders and profits for the coming six months and presents the overall “balance” of opinion weighing up the percentage of firms that are positive in outlook against those that are negative.
The overall confidence balance is the average of the individual net balances, for sales (19 percent), orders (20 percent) and profits (-2 percent). The current overall business confidence
balance is 12, a four point increase on the balance of eight recorded in January. However, while confidence among businesses has improved since January, the majority of UK businesses are still keeping investment on hold.
David Oldfield, Managing Director, Commercial, Lloyds Banking Group
said: “It is encouraging, after a tough first half, to see that SMEs are exhibiting a lift in confidence and that they expect to see improved sales and orders over the next six months. Businesses have proved resilient in a tough economic climate and this is exactly what is required to see the UK economy grow. If firms continue to take advantage of profitable opportunities that will maximise their growth potential we have reasons to be hopeful for the future.
One in five businesses (20 percent) believe they will need to cut investment before the end of the year. While, nearly half of businesses (47 percent) state that their investment will stay the same and only a fifth (18 percent) plan an increase. The resulting negative balance of -2 percent is an improvement on January 2012 but shows that businesses are still cautious about committing to investment spending, which could be to the detriment of UK competitiveness.
Expectations for total sales and orders in the next six months have both improved, after falling to their lowest levels in two and a half years in the last survey in January.
Over a third of businesses (34 percent) said that they expect that their orders will increase over the next six months, compared to 14 percent that think their orders will fall. This results in a 20 percent overall balance expecting orders to increase.
Two fifths of businesses (40 percent) stated that they think sales will increase in the next six months, while just over a fifth (21 percent) expect a decline, leading to a 19 percent overall balance expecting sales to increase.
When asked what the greatest threat to their business would be over the next six months, nearly half (49 percent) of businesses cited weaker UK demand, compared to 60% when asked in the last survey in January.
David Oldfield continued: “Firms continue to see weaker UK demand as the main threat to their businesses, and so it is crucial that they improve their competitiveness on the international stage. However, given that UK businesses have not been increasing their investment levels since the drastic cuts at the beginning of the financial crisis, they should be bold and do so now, especially if they want to improve their competitive edge in demanding export markets. Our job is to work closely with businesses to help them take advantage of opportunities for growth.”
Export sales weakened further
Over a third of businesses (36 percent) expect to grow their total exports during the second half of the year, but 14 percent are expecting exports to drop, resulting in an overall balance of 22 percent saying exports will still rise. This is a drop since January when an overall balance of 25 per cent of businesses believed that exports would increase.
The net balance expecting a rise in total export sales has fallen for the second consecutive survey and is the weakest for over two years, reflecting a sharp fall in exports to Europe and a more moderate decline in exports to other world economies.
Businesses are on balance slightly more optimistic about recruitment over the next six months than they were in the last survey. A fifth (18 percent) of respondents said that they would increase headcount this year but 13 percent stated that they were planning reductions, resulting in an overall balance of five percent expecting to take on more staff by the end of 2012. This is a slight uplift compared to January 2012 when there was a negative balance of -1 percent. Most companies, however, do expect to keep staff levels unchanged.
Businesses’ confidence in prospects for the next six months increased in all sectors except hospitality and leisure. Sentiment has improved most in the healthcare sector, with a balance of 11 percent expecting better sales, profits and orders, compared with somewhat weaker sentiment in January when the balance was just -17 percent.
A quarter (28 percent) of healthcare businesses believe that their orders will increase in the next six months and only eight percent believe that orders will go down. Furthermore, a fifth of businesses (19 percent) believe that they will be in a position to increase prices in the next six months, while nearly two thirds (62 percent) expect that they will need to keep prices on hold and only four percent believe they will have to introduce cuts.
The strongest performing sectors continue to be Business Services, Manufacturing and “other services” which includes the public sector, communications and real estate. Business Services showed a balance of 27 percent saying they are optimistic about sales, orders and profits in the next six months, compared to 17 percent in January. Confidence amongst manufacturing businesses was unchanged at 18 percent, but remained stronger than the all-sector average of 12.
Scotland and Wales both stand out as having the largest increases in business confidence. Scotland having an overall confidence level
of 14 and Wales of seven compared to January when it stood at -12 and -14 respectively.
Businesses in the West Midlands feel the most confident about their prospects for the next six months. A net balance of 20 percent say that they are optimistic about orders, sales and profits for the second half of the year. However, the largest decrease in business confidence was in the North West where the balance stands at 0 compared to 10 in January. Of particular note, is that there is an overall balance of – 17 percent expecting their profits to increase compared to a 0 percent overall balance in January 2012. 19 percent of respondents in the North West do expect their profits to increase over the next six months, yet 36 percent of respondents think that their profits will decrease by the end of 2012.
Trevor Williams, chief economist, Lloyds Bank Wholesale Markets, said: “Businesses have been on a rollercoaster ride since the beginning of the financial crisis so it is good to see that confidence is beginning to rise. As we continue to monitor activity in the Eurozone, businesses should also concentrate their efforts on providing services to the developing economies. In particular, there are still great opportunities to be taken in the BRIC nations
and those with which the UK has had a long historical relationship. Inflation is beginning to come down in the UK, so businesses are now in an ideal position to review their pricing strategy as their profit margins feel less cost pressure.”