Business confidence in UK economy dips for first time in two years

05 August 2014 -

Bosses moderate their optimism about growth as skills shortages remain a major challenge

Jermaine Haughton

British senior executives’ confidence in the economy has dipped for the first time in two years as companies develop a more realistic outlook for the year ahead, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM). 

While the study indicates that bosses expect a modest, 0.9% expansion of the UK economy in Q3 2014, many anticipate a slowdown later on as skills shortages affect a greater number of companies – with turnover and profit-growth posed to suffer. Moreover, the share of businesses operating below capacity continues to fall back, paving the way for the Bank of England to raise interest rates in early 2015.

ICAEW director of business Stephen Ibbotson said: “This slight fall in confidence – the first for two years – demonstrates that businesses are becoming more realistic about the future. The imbalances in our economic recovery that were masked by rising confidence continue to persist. Our exports remain weak, and investment isn’t maintaining momentum.

“We look to the Bank of England and the government to work harder to ensure that the recovery is placed on a broader footing before we see this still relatively high optimism erode.”

Domestic sales have underpinned economic growth, and that reliance upon domestic demand has led firms to take on more staff and even increase training. That is partly why companies believe there will be a 2.5% rise in employment over the next year – equalling more than one million new jobs. However, British firms they are still struggling to find workers with management and non-management skills – particularly those in the construction, utilities and IT sectors.

Grant Thornton UK CEO Scott Barnes commented: “While the last quarter reveals there has been a dip, business confidence remains very positive, with growth still relatively strong and the private sector looking to create thousands of jobs.”

However, he said: “Business is anticipating a slight slowdown in investment, and sourcing the relevant skills has become a greater challenge for some. As the labour market continues to improve, and staff turnover increases, it is important that we ensure that those entering the workforce are adequately equipped with the skills needed to take the economy forward.”

A separate study – the Western Union Business Solutions International Trade Monitor (ITM) – shows that British SMEs feel assured by the state of the economy, with 70% expecting imports and exports to grow over the next 12 months. The quarterly confidence survey of 670 UK SMEs with international trade links suggested that many of their leaders want to expand their firms over the next year, despite cash flow being squeezed by rising costs and late payments. Although 35% of the companies surveyed admitted that they would increase the prices of their products or services – with 56% experiencing a surge in operating costs in the past 12 months – 64% also said they plan to invest more in their business, with the majority of that group looking to invest in technology, process improvement and plants or equipment.

Western Union Business Solutions UK managing director Christina Hamilton said: “These results are a strong indication that the UK domestic recovery is here, and the reported growth expectations are an important sign that British SMEs have turned a corner. In previous quarters, SMEs were focused on survival; now they are investing more and planning to grow.

Hamilton added: “This type of investment in people and process improvement is a clear sign that SMEs that trade internationally are investing for the long term, which – after several years of decline and difficult trading conditions – is very positive news for the wider UK economy.”

However, she warned: “we cannot ignore that the cost of doing business is rising. The reluctance of SMEs to raise their prices and pass on their increased costs to customers shows they still believe the recovery is fragile and are more concerned with being competitive than protecting their profit margins. Late payments continue to plague businesses and their cash flow. For an SME, late payments can mean the difference between paying staff on time, paying suppliers and in extreme cases, staying afloat. Reduced cash flow has a knock-on effect, and can hold SMEs back.”

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