Uncertain 2011 as business confidence falls sharply

Tuesday, November 23, 2010 | Posted by: Fiona Cullinan
Categories: Economy, Thought Leadership | Tags: economy, video, retail, Scott Barnes, recovery, ICAEW, engineering, Michael Izza, manufacturing, construction, business news, confidence, BCM, Business confidence monitor, demand

UK businesses have lowered expectations for 2011 as business confidence weakened once more in Q4, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM). This suggests that economic growth next year will be slower than forecast with companies reluctant to invest and back the recovery.

Download the full BCM report here – or continue reading for a summary of the key findings and a video interview with Robin Fieth, ICAEW Executive Director, speaking about the Q4 report.

Key findings for Q4 2010

• The Business Confidence Index (BCM) has fallen since Q3 2010 by nearly 10 points. It fell from +21.5 to +11.9 with the pace of decline accelerating.
• The percentage of businesses less confident about the coming 12 months has risen from 19% in Q3 to 24% this quarter.
• Expected turnover growth over the next year has declined from 4.9% last quarter to 3.5% as firms become more realistic about economic conditions.
• Confidence in the retail and wholesale, manufacturing and engineering, and property sectors has fallen significantly.

Financial indicators improve though forecasts weaken

There is continued improvement in companies’ financial results with business turnover, profit and exports all increasing this quarter. Despite this, expectations for future growth have been revised as companies become more realistic about 2011. Expected turnover growth over the next 12 months declined from 4.9% in Q3 2010 to 3.5% in Q4. Forecast gross profit growth for the year ahead has also fallen from 4.4% to 3.3%.

Confidence falls in most sectors

The BCM Confidence Index fell sharply in most industry sectors this quarter. Confidence in the Manufacturing and Engineering sector, which saw growth earlier in the year attributed to the inventory cycle, fell from +34.6 last quarter to +16.5 this quarter. The Property sector CI fell from +25.0 in Q3 to +8.3 as the housing market weakens. Retail and Wholesale is the least confidence sector with a CI of +1.7 compared to +23.2 the same time last year. With the increase in VAT in January many retailers will be hoping for a good Christmas.

Customer demand a bigger problem

Combined with lower confidence, 44% of businesses report customer demand is a greater challenge than 12 months ago, up from 37% in Q3 2010. Sectors where customer demand gives particular cause for concern this quarter are Manufacturing and Engineering and Property and Construction, as well as Banking, Finance and Insurance. The challenge of customer demand reflects the softening in the economy.

Michael Izza, CEO of ICAEW, said:

“The steady decline in confidence over recent quarters reflects ongoing uncertainty about the UK economy over the next 12 months. Companies are still cautious to invest – a crucial factor in helping growth and creating a strong recovery. This is compounded by the growing concern that, as the effect of public sector spending cuts begins to take effect, the growth figures that the Office of Budget Responsibility has based its forecasts on will need to be revised downwards. This will have an obvious effect on a recovery which is still to be fully established.”

Scott Barnes, CEO of Grant Thornton, said:

“2011 will undoubtedly be another difficult year with forecasts currently softening on the back of expectations of reduced consumer spending. However businesses are still predicting that exports, turnover and profits will be higher over the next four quarters than in 2010 overall. Businesses are now used to dealing with difficult conditions and will continue to review their own prospects in terms of financing, order books and opportunities. There are many dynamic companies, including exporters buoyed by the relative weakness of sterling, looking to invest in their long-term futures.”

Robin Fieth, ICAEW Executive Director, was also interviewed about the Q4 BCM findings:

For further information, visit icaew.com/bcm

You might also find these video posts useful:

* BCM Q3: Fall in business confidence indicates slow-down in economic recovery
* Insight: Business perspectives on commercial property
* Story of the deal: RDG’s £9.3 million sale to United Business Media