New research from Grant Thornton's International Business Report (IBR) reveals that optimism amongst UK businesses fell by 29 percentage points (pp) in the first quarter of the year. UK business confidence fell to net 44%, representing the largest drop in confidence of any EU member state covered by Grant Thornton's quarterly global survey of 2,500 businesses in 36 economies.
Despite the significant drop, UK business confidence remains well above the global quarterly average of net 26% - itself representing a three-year low. Similarly, the UK remains one of Europe's most optimistic economies, with the EU average standing at net 34% (a 4pp decline from the previous quarter). The IBR also reveals a similar slump in optimism in other geographic blocks, including the G7 (down 7 percentage points in Q1), EU (down 4pp), North America (down 6pp), Latin America (down 16pp) and Asia Pacific (down 10pp).
In the UK, the IBR identifies a drop in revenue and profitability expectations (-12pp and -21pp, respectively), exports (-6pp) and employment expectations (-11pp) are underpinning the decline in confidence over the year ahead. Consequently, fewer companies are planning to invest in new buildings (-8pp) and plants and machinery (-11pp) over the year ahead. The number of firms expressing worries over a shortage of orders (+12pp) and shortage of finance (+6pp) also increased, as more companies (+14pp) pointed to economic uncertainty as a constraint for growth over the year ahead.
Robert Hannah, chief operating officer at Grant Thornton UK LLP, commented: "While British business confidence may have dropped significantly since the beginning of the year, the UK remains one of the more confident markets internationally. Businesses feel caught in a tangled web of pressures, with a potent combination of fragile financial markets, volatility in oil prices, concerns over terrorist attacks and regional issues including the prospect of a Brexit and the US presidential race all adding to the uncertainty in their global economic outlook. Naturally, these issues in isolation can be more readily mitigated against; but in a globalised business context, their interplay has begun to rattle nerves.
"Somewhat ironically, the fundamentals of the UK economy are actually quite strong: low interest rates, low inflation, low unemployment, high levels of corporate cash, banks well capitalised etc. So the knock in confidence could be a case of perception of a problem – for instance, slower growth in China - undermining confidence in other economies and shows how truly linked we are globally.
"We know that the UK economy has significant growth potential and believe that collaboratively addressing some of the fundamental social and economic challenges will create a more vibrant economy, where businesses and people can flourish. Dynamic, growth-oriented businesses should be making the right investments now to capitalise when growth returns, both domestically and internationally."