By Claire West

Confidence among businesses has fallen according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM), indicating that the economic recovery will slow in the second half of 2010. Despite uncertainty as to the impact on the recovery of the Coalition Government’s plans to reduce public spending, the BCM’s financial performance indicators suggest that the financial health of UK businesses continues to improve.

Key findings for Q3 2010 include:-

The Business Confidence Index (BCM) has declined since Q2 2010. It fell from +25.5 to +21.5, a fall of four points
Nearly a fifth (19%) are now less confident about the coming year — up from 14% in Q1 2010.

Despite this, turnover and profit growth returned to positive territory for the first time since the start of 2009. Growth of 1.6% and 1.7% respectively are reported for the year to date.

Businesses expect to increase prices by only 0.9% in the next twelve months which points to limited inflationary pressures and no need for interest rate rises for some time
Michael Izza, CEO of ICAEW, said:

“UK businesses that came through the recession are now facing the challenge of surviving the recovery. They still don’t know what the future holds and are uncertain about how the mood of fiscal austerity will impact the economic recovery. Government needs to deliver on its commitment to ensure Britain is open for business while taking the tough decisions required to tackle the deficit.”

Scott Barnes, CEO of Grant Thornton, said:

"There is a mixed picture for business across the UK's regions and some sectors continue to struggle more than others. Clearly economic conditions remain tough but there are signs that some companies are looking to switch from short-term survival measures to opportunities for growth. The recession has changed the business landscape and the measures businesses have taken to survive may make them stronger as the recovery begins to take hold."

Fall back of confidence

Since the last BCM, the coalition government formed and undertook an Emergency Budget which outlined a combination of public sector spending cuts and tax rises. A Comprehensive Spending Review (CSR) and Pre-Budget Report (PBR) are also expected later in the year. Economic growth was unexpectedly high in Q2 2010 (1.1%) and is anticipated to slow down as the effects of the inventory cycle wear off. Further down the line, cuts and tax rises will start to take effect on overall economic activity. All these factors have lead to a degree of uncertainty among businesses.

Improvement in financial performance

There has been a noticeable improvement in the financial health of businesses. Turnover and gross profits have increased and the yearly growth rate in exports has risen to 2.2% from 1.3% in Q2 2010. Looking ahead, capital investments are expected to grow by 2% over the next 12 months, from static growth, and R&D budgets are set to increase by 1.4% - positive signs, but still well below pre-recession growth rates.

Small increase in recruitment expected

Businesses have reported the smallest annual fall in staff numbers since Q1 2009, expecting the number of employees to increase by 1.1% in the next year. With more vacancies becoming available, employee movement becomes more frequent. 13% of businesses feel that staff retention is a greater challenge compared to a year ago though only modest salary growth is expected — 1.5% in the next twelve months.

Inflationary pressures ease

Businesses expect to increase selling prices by on average 0.9% over the next year, while they expect input prices to rise by 1.4%. The number of firms with below normal stock levels continues to fall in this quarter, with the share of businesses with below normal stock levels down to 14% from 26% a year earlier. These findings suggest that businesses’ price expectations remain relatively anchored.

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