By Daniel Hunter

Business confidence has improved in the last three months, suggesting the UK will return to growth in Q2 2012, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM).

Despite a strong rebound in the Confidence Index, BCM supports the view that the UK’s economy will continue to ‘zig-zag’ over the next 12 months, with economic recovery still very fragile.

Key findings for Q2 2012 show:-

- The BCM Confidence Index stands at +12.0, up from -9.3 in Q1 2012 and the highest level since the second quarter of 2011.

- This strong improvement in confidence suggests the current recession is likely to be short-lived, with quarter-on-quarter growth of 0.6% forecast for the second quarter of 2012.

- Businesses expect capital investment to grow by just 1.4% over the next 12 months. Improvement in confidence does not mean they plan to start spending cash surpluses accumulated in recent years.

- Companies report that exports are 4.1% higher than a year ago, up from 3.3% last quarter and the strongest growth since Q3 2011

“Although there has been a large increase in confidence there is still an air of fragility to the UK economy," Michael Izza, chief executive of ICAEW, said.

"Government needs to harness businesses’ increasing optimism about the UK’s economic future and turn it into sustainable, consistent growth. To squander it could consign the UK economy to stagnation for the immediate future.”

Grant Thornton CEO, Scott Barnes, said the latest data is positive and whilst the climate is tough it may become the 'norm' for a while.

"Any improvement in the key performance indicators in the Business Confidence Monitor is positive," he said.

"Turnover and profits are all increasing but nowhere near the rate seen pre-recession and businesses are beginning to realise that this environment may be the norm for some time. However, we are working with dynamic companies that are delivering high growth in both domestic and global markets, so businesses must continue to look for opportunities."

UK to come out of recession in Q2 2012

The Business Confidence Index continues to be a strong forward indicator of GDP growth with a -0.2% fall in GDP correctly predicted in Q1 2012. The increase in confidence by +21.3 points implies GDP growth of +0.6% in Q2 2012. However, output remains below pre-recession levels and there are significant risks to economic stability. These include high oil prices, the continued eurozone sovereign debt crisis, elections in France and Greece and continued high unemployment in Spain.

Capital investment plans still low

Businesses expect capital investment to grow by just 1.4% over the next 12 months. This suggests that the improvement in confidence isn’t translating into plans for companies to start spending the cash surpluses they have been accumulating over recent years. Addressing this needs to be a priority for policy makers as it could really help support a return to sustained economic growth in the coming months.

Exports and employment

This quarter, businesses report that exports are 4.1% higher than a year ago, up from 3.3% last quarter and the strongest growth since Q3 2011. Reported export growth has returned to levels which are comparable with the pre-financial crisis period, suggesting that the ongoing weakness of sterling since the recession of 2008/09 may be supporting demand for UK exports. Businesses expect exports to grow by 4.5% over the next 12 months, up from 3.9% last quarter.

Job creation in the private sector remains modest, but hiring is expected to pick up. Firms increased headcount by 0.8% over the 12 months to Q2 2012 and expect it to rise by 1.4% over the coming 12 months. Due to above target inflation, households will continue to feel squeezed with limited salary growth expected for the next 12 months.

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