By Max Clarke

68% of businesses plan to expand in the next 12 months, as optimistic firms lower recruitment freezes and redundancy programmes.

Recruitment freezes in London caused by the recession are expected to thaw over the coming six months, and firms are cautiously optimistic about prospects for the economy, according to the latest CBI / KPMG London Business Survey.

More London companies (45%) are planning to hire as normal over the next six months, compared with 11% a year ago. Only 16% of companies said that they would have a recruitment freeze during the next six months, compared with 26% a year ago. The proportion of companies saying they would make redundancies over the next six months fell to 29% from 53% a year ago.

Recruitment freezes are expected to fall by more than a third to 16%, from 26%. At the same time, the proportion of companies making redundancies is predicted to fall from 53% to 29%.

The survey shows a continuing trend of cautious optimism: 54% of firms are optimistic about their business prospects over the next six months, while 35% are neutral, and 12% feel pessimistic. The data show that 68% plan to expand their businesses in the next 12 months compared with 58% six months ago, with 47% planning to expand within London.

But optimism is tempered by caution about the economy, leading to uncertainty. Businesses’ views of how the economy will perform over the next six months are mixed: 45% are neutral about economic recovery, 34% feel pessimistic, while only 17% are optimistic.

Regarding the effect of the current economic situation on companies, 88% of respondents say they are concerned that the uncertain environment is having at least a moderate impact on their businesses. Greater complexities in forecasting and business planning are highlighted by 78% of respondents as at least having a moderate impact.

The vast majority of respondents support the Government’s measures to reduce the budget deficit, but many are concerned about economic and business uncertainties, including the knock-on effects of public sector cuts and the possibility of a double-dip recession. Nearly all of the capital’s senior executives (97%) say that they agree with the Government’s approach of reducing public spending.

When asked about the major issues of concern for business over the next 12 months, 69% of firms highlight the possibility of a double-dip recession, while 55% say reduced public sector investment is a worry.
Despite expansion plans for the next 12 months, in the shorter term companies are controlling costs by exercising caution in their spending: in all areas surveyed, fewer respondents say that they will invest the same or more in the coming half year compared to the previous six months.

The survey shows that 84% of businesses rate London as a good or very good place to do business, the highest figure since September 2008. London’s status as a world city remains strong, with 79% of respondents saying that they think that this will remain the same or improve in the next five years.

The wide skills base and talent pool are once again viewed as London’s most attractive business strengths, being ranked by 69% of companies. Access to markets is the second most attractive strength, cited by 67% of respondents, up from 45% six months ago.

Senior executives (67%) still see overall operating costs of doing business in London as the capital’s primary weakness, although this figure is down from 78% six months ago. The tax environment continues to be of concern for 57% of firms. Many companies (63%) also say that the burden of regulation has increased over the past 12 months, 53% highlight employment regulation as the most burdensome.

The lack of transferable skills is currently the greatest threat to London’s labour market, according to 56% of businesses. Giving their view before the recent announcement on migration, 69% said a proposed permanent cap would negatively impact on their ability to recruit from overseas.

There are mixed views of whether transport services are improving or deteriorating, but across the board, fewer respondents think that these services in the capital show signs of improvement.

Companies are positive about the London 2012 Olympics: 88% say that they believe the promotion of the capital internationally will be the most important benefit from the Games.

As a top priority over the next 12 months, 73% of businesses say they want the London Mayor to ensure that levels of investment in major transport projects are maintained. The spending review was therefore a very good outcome, given the commitment to Crossrail, tube upgrades and Thameslink. The second highest priority, cited by 52% of businesses, is for the Mayor to promote London internationally.

Sara Parker, CBI London Regional Director, said:

“It’s great that the employment climate in London is improving. Companies are starting to end hiring freezes and recruit normally again which is good news for the capital.

“London businesses are growing in confidence and most now plan to expand over the coming year. But this cautious optimism is tempered by the continuing economic uncertainty, particularly regarding the knock-on effects of public spending cuts, which is making future planning difficult.

“Companies also voice specific concerns about the increasing burden of regulation, especially employment rules. The Government must work with businesses to find the right balance between maintaining essential legislation and cutting unnecessary red tape.”

Richard Reid, London Chairman, KPMG LLP, said:

“It is encouraging that after two difficult years for businesses in the Capital, optimism levels are starting to return and businesses are getting back on track with expansion plans now on the agenda. London has an amazingly robust business community who will be instrumental in getting the UK economy moving and putting us back at the top of the global competitiveness table.

“However, the grey cloud of the impact of austerity cuts on our economy, combined with overly burdensome regulation and issues with the transport network are ever present and policy makers have to get on top of these issues in order to protect our competitiveness. Continued focus on maintaining high levels of investment in major transport projects and promoting London throughout the world will be vital to ensure London’s economy continues to grow.”