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Businesses More Cautious As Confidence Continues To Fall

By CreditMan Wednesday, February 4, 2015

Business confidence has fallen for another quarter as businesses become more cautious about their prospects in the year ahead. With less than 100 days until the General Election, the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) indicates a stabilising of the trading environment and, after three strong quarters, a slowdown in business investment.

Key findings for Q1 2015:

  • The BCM Confidence Index stands at +16.8, down from +28.6 last quarter - reflective of a more challenging economic environment
  • Skills shortages and staff turnover continue to be an issue for businesses in Q1 2015. After three quarters of strong growth, capital investment figures have slowed
  • Salary growth remains muted despite falls in inflation meaning employees are feeling better off
  • Economic growth remains driven by domestic demand fuelled by strong employment figures

Michael Izza, ICAEW Chief Executive, said:

“Although not as confident, businesses remain optimistic about the UK’s economic outlook. Whilst confidence has fallen back, perhaps not surprising in a General Election year, it remains high and above pre-recession levels.

“Much of this optimism is being driven by the growth in domestic demand. Consumers are reacting to the unusual period of low interest rates, inflation, oil and commodity prices by spending. Wages are now outstripping inflation and employees are feeling empowered to seek new pastures in order to maximise their earnings. This leads to headaches for business leaders as to the best way to reward and retain their staff.

“Yet this shouldn't detract from the need for the UK to rebalance its economy, grow export markets and reducing the dependence on service industries, particularly financial services. While it is better to have growth based on domestic demand than no growth at all, with a General Election campaign in sight it is imperative that business receives long-term assurances about the UK’s economic direction which is not deflected by short-term campaign promises.”

Scott Barnes, CEO of Grant Thornton UK LLP, added:

“Certainty is the bedrock of business planning and the number of ‘known unknowns’ on the horizon appear to be rattling UK business confidence. The decent UK business growth that has been achieved over the last couple of years, put the UK in one of the strongest positions amongst global economies as we entered the year. Yet, in the context of a highly unpredictable UK General Election just months away, coupled with significant uncertainties across the Eurozone and the UK’s relationship with the EU, some jitters amongst UK business leaders are inevitable. Moreover, a continued domestic skills shortage is leaving employers short-handed and potentially unable to meet what demand exists – an untenable position for any business.

“To ensure a long-term, sustainable and diversified business environment in the UK, a step-change in mind-set is needed from whichever party(ies) take residence in Downing Street. This must include considerations for supporting our businesses in new markets abroad, particularly where demand for ‘Brand Britain’ carries a premium. It also needs to address the skills imbalance and develop a world-class talent pool at home, with the right skill-sets to match employment opportunities throughout the economy.

Confidence down across most sectors

With less than 100 days until the General Election, and coupled with an uncertain economic future in the Eurozone and elsewhere, fewer businesses are as confident about their prospects as they were last quarter. Banking and construction have seen dramatic falls. However the IT and communications sector is bucking the trend, with businesses more confident about their prospects over the next 12 months, compared to a year ago.

Salary growth improves in real terms, but remains weak

Due to the dramatic fall in inflation seen in recent months, salary growth is now comfortably above inflation, so employees are now starting to see a prolonged real-terms growth for the first time in several years. However wages themselves aren’t rising and are still well below pre-recession growth levels.

Construction sector most at risk from skills shortages and turnover

As unemployment continues to fall, and the number of businesses operating with spare capacity continues to reduce, staff turnover and skills shortages become a greater issue for more businesses. This is particularly acute for the construction sector, with 44% of businesses struggling to find workers with the right non-management skills, compared with 33% the previous quarter.