UK Business Confidence Monitor Q4 2016

Transcription

1 UK Business Confidence Monitor 2016 BUSINESS WITH CONFIDENCE icaew.com/bcm

2 2016 Overall confidence -9.8 Export sales growth Input price growth remains negative to outpace domestic sales rising faster than selling prices Key points Confidence across all sectors and regions remains weak, reflecting Brexit worries. Sluggish demand and rising costs are also widespread concerns. Domestic sales growth is slowing and is expected to be outpaced by exports in the year ahead. However, the latter are still rising only modestly and are smaller in scale than their domestic counterparts. Spare capacity is on a rising trend, which is detrimental for both profits and investment. Profits are also being hurt by input prices rising faster than selling prices. Implications While the world hasn t ended, as some remainers implied it might, tangible effects of the EU referendum are still difficult to identify. However, the government has now set a timeline to trigger Article 50 and the clock is ticking. Therefore, an atmosphere of uncertainty continues to permeate most sectors and regions. Business confidence has marginally improved from but remains low. The lack of confidence is reflected in lower growth in investment and reductions in the outlook for sales growth and profitability. However, GDP growth in exceeded most forecasts at +0.5%, though at a lower rate than the previous quarter. Looking behind this headline rate the GDP growth was underpinned by strong consumer demand, with manufacturing and construction less robust. 2 icaew.com/bcm

3 Investment growth Salary growth Banking, Finance & Insurance softening easing confidence falls Key points Expectations for capital investment, Research and Development (R&D) and staff development are all softening. The same is true for employment growth. Wage growth is also easing at the same time as inflation is on the rise, squeezing consumer purchasing power. Banking, Finance & Insurance and Business Services sectors have seen a larger deterioration in confidence, in all likelihood related to increased talk about hard Brexit. Implications The fall in the value of sterling has given hope to exporters and, for the first time in several quarters, export growth is forecast to outstrip domestic sales. However, for many importers the weak currency will drive up input prices in the medium term until foreign exchange hedges are exhausted. This will start to push up inflation and erode the real growth in income that many consumers have enjoyed. Companies will need to protect margins as input prices increase. This could mean selective price increases where demand and the competitive position allow, or use weakness in sterling to increase exports, and review supply chains to reduce cost. Balance sheet management will remain important but, as in any turbulent time, there will be opportunities for investment. icaew.com/bcm 3

4 Business confidence in 2016 Fig. 1 Trend of UK business confidence % more confident 34% as confident 41% less confident compared to the last 12 months Confidence remains weak, with Brexit uncertainty one of the factors The ICAEW UK Business Confidence Monitor (BCM) Index remains negative, at -9.8 in 2016, indicating that companies confidence is still weak. It is nevertheless markedly stronger than in the recession. Confidence was falling away long before the June EU referendum, with companies facing slowdowns in both the world economy and domestic demand. The latter is linked to low growth in real personal incomes, and possible concerns over future cuts in welfare payments, tax increases or interest rate rises. Against that backdrop, business confidence took a further hit from the result of the EU referendum on 23 June. Ongoing uncertainty means that optimism remains delicate; it is unclear when exactly the departure will happen, and how radical it is likely to be. Companies are concerned about future trading arrangements within and beyond Europe, and also about the availability of skilled and unskilled labour if migration flows are restricted. Other concerns relate to possible changes to domestic laws and regulations. Despite these uncertainties, companies do have some reasons for optimism. The government has recently indicated that it is relaxing its fiscal policy rules, which should help to maintain growth in domestic demand. Meanwhile sterling has fallen sharply, to the benefit of UK competitiveness. These factors perhaps explain why business confidence, though weak, is significantly less so than in the recession of icaew.com/bcm

5 Fig. 2 Forecast of quarterly GDP growth based on ICAEW Confidence Index % Quarter-on-quarter GDP growth Forecast of quarter-on-quarter GDP growth based on Confidence Index GDP growth better than expected in, but may weaken The preliminary ONS estimate of GDP indicates that the UK economy expanded by 0.5%, quarter on quarter, in Although this was better than market expectations, a weaker performance in is likely. Within the total, the service sector expanded by 0.8% quarter on quarter in 2016, an improvement on the 0.6% pace of. According to the ONS Index of Services, consumer-facing sectors such as retail trade, food and drink services, and accommodation, all continued to grow. However, the construction sector contracted by 1.4%, with repair & maintenance and private new housing showing the biggest declines in output, probably reflecting uncertainty over future trends in house prices and interest rates. Manufacturing volumes were also down, by -1% quarter on quarter in 2016, suggesting that the depreciation of sterling has not yet boosted manufacturing output. Part of the reason for this is likely to be that over half of all UK exports to the EU are denominated in foreign currencies, as are 40% of exports to non-eu countries, and these do not automatically become cheaper when sterling falls. In time, however, UK exporters are likely to lower their foreign currency prices, and overall export volumes should then improve. Meanwhile, with export volumes yet to accelerate, consumer spending growth undermined by rising inflation, and investment also subdued because of uncertainties, it is very possible that 2016 will see weaker GDP growth than. Indeed we expect a GDP rise of only 0.1%, quarter on quarter. icaew.com/bcm 5

6 Business financial performance Fig. 3 Export and domestic sales average % change % Change Forecast Exports Domestic sales 3 Overall sales Sluggish domestic sales growth with exports expected to overtake it Overall sales volume is growing at 3.7% year on year in 2016, compared to around 5% during most of This weaker performance is associated with both exports and domestic sales. The trend is expected to improve, but only modestly. Export sales slowed sharply at the end of 2015 and have since been very gently recovering, to 2.8% year on year in In contrast, domestic sales growth decelerated progressively in the four quarters to mid-2016, since when their pace has flattened out, at around 3.5% per year. Looking ahead, domestic sales growth is expected to remain at its current relatively subdued rate as consumer incomes, and therefore spending, are restricted by low wage increases and rising inflation. Meanwhile, the sharp decline in sterling since the Brexit vote has brightened the longer-term outlook for exports, which are expected to accelerate over the coming 12 months, outpacing domestic sales for the first time since That said, the gap in expected growth rates between domestic sales and exports is only slight, at 3.8% for exports in 2017 versus 3.5% for domestic sales. And since, in absolute terms, export sales increases are much smaller than domestic sales, the net effect will be that total sales growth will be only marginally stronger in the year to 2017 than in the year to date. Companies expect volumes to grow by 4% over the next 12 months, rather than 3.7% as in the last 12 months. 6 icaew.com/bcm

7 Fig. 4 Spare capacity % of firms working at or below capacity % Change Below capacity At capacity % below capacity Manufacturing & Engineering % below capacity IT & Communications Spare capacity on an upward trend A growing proportion of companies are working below capacity, reflecting sluggish growth in sales across much of the economy. The 2016 figure is 51%, compared with 47% a year earlier. Although the latest figure for companies working below capacity is still significantly below the rates seen in earlier years, it nevertheless indicates pressure on company margins, with firms having to finance their capacity from more limited revenue streams. The problem is particularly evident in the Manufacturing & Engineering sector, where the percentage of firms working below capacity is one of the highest, at 66%, reflecting the particular weakness in sales that the sector has been experiencing. In contrast, in the strongly growing IT & Communications sector, only 39% of companies are working below capacity. Slow growth in sales is having a similar impact on skill shortages. In 2016 only 13% of companies say that the availability of management skills is an increasing challenge for their businesses compared to 12 months ago which is a two-year-low figure. The same pattern is evident for non-management skills. It is a matter of concern for firms when a slowdown in sales growth is a reason for this trend, rather than an increase in skills availability. icaew.com/bcm 7

8 Fig. 5 Gross profits growth and prices average % change % Change Forecast Input prices Selling prices 3 2 Profit Input price inflation rising, limiting profit growth Rising energy prices during 2016 and weaker sterling since the middle of 2015 are pushing up input price inflation in this year s final quarter. The result is that a further squeeze on profits growth is likely during 2017 as sales growth remains low, limiting companies ability to raise their selling prices. Through much of 2015 and 2016 companies experienced only modest rises in their input costs, with average increases close to just 1%, year on year. However, in the current quarter the growth is noticeably higher, at 1.4%. The result is that input costs are now rising at twice the rate that companies are able to achieve for their selling prices, due to the sluggishness in domestic demand. Prices are only 0.7% higher in 2016 than they were a year earlier. The consequence is downward pressure on profits, which continue to rise by just 3.1% per year, on a par with the rate of increase achieved earlier in 2016, but slower than in 2015, confounding expectations of an improvement. Next year, businesses project that input price inflation will accelerate to 1.7% year on year. They are not, however, expecting that to be matched in their selling prices, which they think will remain at 0.9% for the next 12 months. Partly as a result, companies forecasts for profits growth (which tend to be more bullish than the eventual reality) are the lowest for four years, at 3.7%. 8 icaew.com/bcm

9 Fig 6. Capital investment average % change % Change Forecast R&D Capital investment 3 Staff development Investment growth weakened, with expectations for a further slowdown With growth in sales and turnover slow, profits depressed, and high degrees of uncertainty about economic conditions all manifested in a lack of business confidence, companies expect only a small rise in capital spending in 2017 after just 2.3% in the year to Throughout 2016 companies have reported capital investment rising by 2.3% 2.4% per year. That is back to the experience of the 2012 recession, and significantly down on the increases achieved in the intervening period, although even those never got above 3.3%. However, all of the recent figures are generous compared to companies expectations for the year ahead. These hit a four-year low in 2016 and are barely changed in, at just 1.2% for the next 12 months. Furthermore, investment in both R&D and staff development is expected to rise at the same low rate of 1.2% in the year ahead. Against that, some modest reassurance may be gained from the fact that, in the past, companies have tended to raise their investment somewhat faster than they expected to. A lot here will depend on the scale of competitive pressure that firms experience in the marketplace, and hence on their need to invest in new products and more efficient processes. In 2016, 35% of companies say that this is an increasing challenge that they face compared to a year ago more so than for almost any other factor. icaew.com/bcm 9

10 Fig. 7 Average total salary average % change % Change Forecast CPI inflation Employment 3 2 Total Salary Price inflation starting to erode consumers purchasing power Over the last few years, salary growth has been modest, at just above 2% per year. In the latest two quarters however, the pace of increase has dropped back slightly, to 1.9% in It is likely that pay moderation is being driven by weakness in overall business performance. In particular, Manufacturing & Engineering firms are currently increasing salaries by only 1.6% year on year, a rate expected again in 2017, reflecting the poor sales performance that the sector has been experiencing. And although service sector wages are currently rising faster, at 2% in 2016, they are projected to slow to 1.6% next year. Indeed, some service sectors are already scaling back: IT & Communications pay rises are down from 2.2% a year ago to only 1.7% at present. Much the same is true for Banking, Finance & Insurance, where firms increased total pay by just 1.3% in, the slowest rate of growth since At the same time, rising business costs (higher oil prices and imported inflation) are pushing up the ONS measure of consumer price inflation, which reached 1% year on year in September. With further rises likely in 2017, real wages will surely be squeezed next year. That will occur against a background of uncertainty generated by Brexit, slower job creation, and cutbacks in government support for people on low incomes. Taken together, these developments will create stronger headwinds for those businesses affected directly or indirectly by consumer demand. 10 icaew.com/bcm

11 Trends in business confidence INDUSTRY Fig. 8 Trend of business confidence by industry UK AVERAGE All Production Industries Energy, Water & Mining Manufacturing & Engineering Construction All Service Industries Retail & Wholesale Transport & Storage IT & Comms. Banking, Finance & Insurance Property Business Services Finance, business services and IT & Communication confidence deteriorates In most sectors, business confidence has recovered slightly in 2016 since the last quarter, even if the BCM index remains weak. The exceptions are Banking, Finance & Insurance, Business Services and IT & Communications. In Banking, Finance & Insurance the Confidence Index dropped to in 2016, coinciding with increased talk of a hard rather than soft exit from the EU, and therefore a loss of access to European financial markets. The sector is also sensitive to changes in the broader economy, both domestic and global. Continuing low interest rates are also a potential problem for banks whose incomes depend on the spread between lending and saving rates. The financial sector s concerns may also be behind weakened confidence in Business Services and in IT & Communications, since both of those sectors sell heavily to financial services companies. In contrast, Manufacturing & Engineering confidence is less negative in than in the last quarter but still low; likely due to the fall in sterling. The Construction sector shows a particular improvement, following a sharp drop in ; the index has climbed back from to -8. Similarly, in Property the index has gone up from to In both cases it is possible that companies initially over-estimated how bad the response of their customers and clients would be to the Brexit vote. icaew.com/bcm 11

12 Trends in business confidence REGION Fig. 9 Trend of business confidence by region UK AVERAGE England London South East (excl London) South West East of England East Midlands West Midlands North West Northern England Yorks & Humber Scotland Wales London and the Midlands notable for further declines in confidence The majority of regions have seen confidence improve slightly but remain very subdued in historic terms. There are, however, several regions where business sentiment has deteriorated further since last quarter. The Confidence Index fell to in London in 2016, its lowest since With employment in the capital still rising at 2.8% a year and exports on a clear upward trend (boosted by the weaker pound), it is clear that other factors are at play. Confidence in London has been hit by softening expectations for domestic sales for the year ahead. In addition, increasing talk of a hard Brexit is likely to be having a negative effect on businesses in the capital. Many London firms have highlighted the need for a smooth transition in terms of passporting rights, and access to the EU single market more generally, and some have even indicated that they are considering relocating to other financial centres within the EU. Firms in the East Midlands have particularly high expectations for input prices increases over the next 12 months, at 2.4% year on year, reflecting the region s large manufacturing base and resulting susceptibility to imported inflation. In a bid to maintain profit margins, firms are expecting to pass some of these costs on to their customers but this could prove troublesome, as 50% of all business leaders in the region are reporting that customer demand is an increasing challenge. This is the highest proportion for three years. 12 icaew.com/bcm

13 Trends in business confidence TYPE Fig. 10 Trend of business confidence by company type UK Confidence Index All UK Listed FTSE 350 All Private Companies Private Companies Large Private Companies SME Confidence holding up for SMEs compared to larger firms Confidence is holding up rather better among privately-owned small and medium-sized enterprises (SMEs) than for larger companies, whether privately owned or FTSE 350 members, although even for SMEs the Confidence Index is still slightly negative. Among FTSE 350 companies, the Confidence Index is in negative territory for the third quarter in a row, and has barely changed from last quarter, at in. Employment is up by just 0.1% over the last 12 months and is expected to decline by 0.7% in the year ahead, making FTSE 350 businesses the only company-type where job cuts are anticipated. The same statement is true for capital investment, with a decline of 0.2% predicted by FTSE 350 companies in the year ahead. Privately owned SMEs are rather more confident than larger firms, whether quoted or unquoted, with the Confidence Index only modestly negative at -3.3 in This may be because smaller firms are less likely to be exporters than larger firms, so their optimism has been less dented by the vote to leave the EU. That said, the subsequent fall in sterling may confer fewer benefits to them than the larger firms; and indeed may even be negative given it is clearly driving up input costs. icaew.com/bcm 13

14 About BCM BCM is one of the largest and most comprehensive quarterly reviews of UK business confidence and provides a regular snapshot of the economy, informed by senior business professionals running all types of businesses across the UK. It is shared with a range of national and regional policymakers, the business community, academics and researchers. It is a credible predictor of GDP and economic change and supports policy decision-making. The report is based on a continuous research programme of approximately 4,000 telephone interviews each year with ICAEW members working in industry and commerce. This probes opinions on past performance and future prospects for members businesses, and investigates perceived changes in the impact of factors such as availability of skills, government regulation and the tax regime. Data are weighted to represent the UK economy by value. For further technical details please see: BCM Technical Appendix at icaew.com/bcm Business Confidence Index methodology The Business Confidence Index is calculated from the responses to the following: Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months? A score was applied to each response as shown on the right, and an average score calculated. Using this method, a Confidence Index of +100 would indicate that all survey respondents were much more confident about future prospects, while -100 would indicate that all survey respondents were much less confident about future prospects. Further technical details on the design of the survey are available upon request. Variable Score Much more confident +100 Slightly more confident +50 As confident 0 Slightly less confident -50 Much less confident -100 Acknowledgments Oxford Economics Oxford Economics is one of the world s foremost advisory firms, providing analysis on 200 countries, 100 industries and 3,000 cities. Their analytical tools provide an unparalleled ability to forecast economic trends and their economic, social and business impact. Headquartered in Oxford, England, with regional centres in London, New York, and Singapore and offices around the world, they employ one of the world s largest teams of macroeconomists and thought leadership specialists. Kudos Research Interviewing and data analysis was undertaken by Kudos Research. Kudos Research specialises in premium quality, custom-tailored UK and international data collection, as well as data analysis and research advisory services. Kudos Research interviews customers, stakeholders, business leaders and opinion formers across the globe, online and by telephone, as well as recruiting them for focus groups and depth interviews. 14 icaew.com/bcm

15 Other quarterly reports from ICAEW UK Economic Forecast Produced with Oxford Economics, ICAEW s economic partner, this quarterly newsletter provides a forward-looking perspective on how the UK economy is going to develop over the next 12 months. Economic Insight South East Asia Middle East Greater China Africa These quarterly newsletters provide a unique perspective on the prospects for each region as a whole and for individual economies against the international economic background. icaew.com/economicinsight

16 ICAEW is a world leading professional membership organisation that promotes, develops and supports over 147,000 chartered accountants worldwide. We provide qualifications and professional development, share our knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business our members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together we contribute to the success of individuals, organisations, communities and economies around the world. Because of us, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance. ICAEW Chartered Accountants Hall Moorgate Place London EC2R 6EA UK T +44 (0) E bcm@icaew.com icaew.com/bcm linkedin.com find ICAEW twitter.com/icaew facebook.com/icaew ICAEW 2016 MKTPLN /16