By Daniel Hunter
Businesses plan to cut back on capital investment in response to growing concerns about the economic outlook according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM).
With the Confidence Index pointing to a double-dip recession, the report gives little comfort to government as it seeks to drive growth in the UK economy.
Key findings for Q1 2012 show:-
- Business investment is important for future growth however firms are reining in plans for capital investment;
- Job creation plans remain subdued, though SMEs are more likely than larger companies to take on people in the next 12 months;
- Nearly a fifth of businesses (19%) have above normal stock levels probably due to a lack of customer demand and over half of businesses are operating below capacity;
- The BCM Confidence Index has steadied from -9.7 in Q4 2011 to -9.3. This compares to +8.1 in Q3 2011 and shows the massive fall in confidence that businesses experienced over the last six months;
- Salary expectations for 2012 are depressed with businesses predicting modest increases of up to 2% - more unwelcome news for the squeezed consumer.
“This survey shows that businesses are responding to concerns about the economic outlook by cutting back on investment in equipment and people," Michael Izza, Chief Executive of ICAEW, said.
"This is at a time when Government desperately needs businesses to be growing. At the moment, it is hard to see where this growth will come from and the Chancellor needs to use the forthcoming budget to give businesses reasons to be more confident about the future — and unlock potential investments.”
Grant Thornton CEO, Scott Barnes said the main concern is that international demand will remain low as unemployment rises.
"The key performance indicators in the BCM remain weak and the concern for business is that domestic and international demand will remain low as we see unemployment continue to rise in 2012 and wages remain static," he said.
"However these figures are not as bad as anticipated and many of the companies surveyed are predicting at least some growth. They need greater certainty in domestic and global markets before they opt for a more expansive path."
UK technically in recession
The Business Confidence Index has been a close predictor of GDP growth in the eight years of its existence. Recent GDP figures show a contraction of -0.2% for Q4 2011 and, using the Index, another contraction of -0.2% is predicted for Q1 2012, suggesting that the UK economy is again in recession. The levelling out of confidence in this quarter does however indicate that this second recession will not be as deep.
Limited employment and salary growth
Expected salary growth for the next year continues to fall. The average total salary is to only increase by 1.1%. With the effects of inflation, it will feel like a pay squeeze for the majority of employees. The labour market rate of growth in the private sector will not be strong enough to prevent unemployment rising in 2012 — Government is relying on the private sector to pick-up public sector job losses. On a positive note, SMEs will be the main drivers of job creation with a headcount increase of 1.8% predicted for the next 12 months. This compares to only 0.5% by large companies.
London confidence falls most in 12 months
Despite the forthcoming Olympics being hosted in the capital, London has experienced the biggest drop in confidence in the last 12 months. Uncertainty in the financial services sector and potential regulatory changes have had an impact. The IT & Communications sector is faring better than any other and reported a fourth consecutive quarter in positive territory.
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