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UK Business Confidence Monitor
Q2 2016
BUSINESS WITH CONFIDENCE
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Q2 2016
Overall confidence
Domestic sales
Profit growth
continue to slow
declines further
+0.8
drops sharply
Key points
Confidence remains on the downward
trend of the last two years, with the
index barely positive this quarter.
Domestic sales growth continues to
ease, while export growth starts to
improve. As a result, turnover growth
stabilises but at a slower pace than a
year ago.
With weaker turnover growth, profit
growth declines further as businesses
are only able to achieve modest
growth in the prices they charge.
Implications
The significant decline in confidence to the lowest level since
2011 is no doubt impacted by a number of factors including
Brexit. Regardless of the arguments for remaining or leaving,
the uncertainty it creates is an obvious trigger for a big
downturn in confidence – which affects business investment
and hiring decisions. While both sides are struggling to
articulate what the future could look like, business is worried
and doesn’t know what it could end up with on 24 June.
Whichever way the vote goes, doubt is likely to continue
with a corresponding impact on confidence.
2
Elsewhere, profit warnings at UK listed companies are
at their highest level since the financial crisis, and
banking is having a tough year so far − both of which
are having an impact on the capital. A lot of the recent
residential construction in London has been aimed at
overseas buyers, but they are holding off due to
uncertainty at home and a less favourable tax regime
in the UK.
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Capital investment
growth
Employment growth
Service sector
weak
softens slightly
falls
Key points
Capital investment and R&D growth
remains sluggish due to uncertainty in
the wider economy and lower profit
growth.
Employment growth is lower than a
year ago, and is expected to soften
further, while salary growth stays
broadly in line with the last year.
Confidence in the Service and
Construction sectors has fallen sharply
this quarter; into line with the
Production sector.
Implications
The rest of the Service sector will also be considering the
impact of the increased national living wage.
While small and medium-sized companies have been the
most vocal about the effects of the national living wage and
auto enrolment, there is increasing evidence that larger
companies are feeling the pinch too.
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The weakness of sterling continues to help exporters,
despite unfavourable economic conditions and political
uncertainty in Europe and some BRIC countries. Recently,
however, sterling has started to strengthen which could
halt this trend.
3
Business confidence in Q2 2016
Fig. 1 Trend of UK business confidence
50
40
RECESSION
31.7
30
24.6 25.8 25.5 21.5
20
10
0
11.9
4.8
37.2 37.3
24.0
9.6
13.7
-10
-9.7
12.8
12.0
8.1
32.3
31%
more confident
28.6
22.4
16.7
16.8 16.2
1.1 4.2
15.6
11.4
0.8
-20
-30
40%
as confident
-9.3
-28.2
-40
-50
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009
2010
2011
2012
2013
2014
2015
2016
29%
less confident
compared to the last 12 months
Confidence falls sharply, as a result the index is barely positive
Key highlights
The latest ICAEW/Grant Thornton UK Business Confidence
Monitor (BCM) shows a further decline in business
confidence. The index is still positive, but only just,
at 0.8, with almost as many businesses being less
optimistic about economic conditions in the next
12 months as are more positive.
Business leaders’ confidence about the economic outlook
has now been declining, with barely any interruption,
for two full years. This reflects in large part a gradual
deterioration in UK economic performance; GDP growth
slowed from 2.9% in 2014 to 2.3% in 2015. Although
consumer spending was helped last year by very low
inflation and continuing low interest rates, corporate
investors remained cautious and net exports were hit by
4
the strong currency and weakness in the global economy,
not least the slowdown in the Chinese economy.
While softening economic conditions are likely to be the
major factor harming business confidence, two specific
factors may have introduced extra uncertainty in the latest
quarter. Firstly, the Chancellor’s March Budget created
various concerns. The Office for Budget Responsibility
(OBR) revised down its growth forecasts and raised its
borrowing projections, while concerns were raised about
the possible impact of austerity measures on consumer
spending, later this year. Secondly, the announcement of
the date of the Brexit referendum brought that issue to
the forefront, and by doing so increased uncertainty for
many businesses.
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Fig. 2 Forecast of quarterly GDP growth based on ICAEW Confidence Index
% 2.0
1.5
Quarter-on-quarter GDP growth
1.0
Forecast of quarter-on-quarter GDP
growth based on Confidence Index
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010
2011
2012
2013
2014
2015
2016
0.4%
0.3%
Q1 GDP
actual
growth
Q2 GDP
growth
estimate
Q2 2016 likely to see a further weakening in GDP growth, continuing a clear trend
Key highlights
The Office for National Statistics (ONS) has recently
published its preliminary GDP estimate for Q1 2016.
It shows an increase of 0.4% quarter on quarter,
compared with 0.6% in the final three months of 2015.
We estimate a further slowdown to 0.3% growth in
Q2 this year, largely reflecting the decline in business
confidence.
In the ONS estimate for Q1 2016 the pattern across sectors
remains relatively unchanged compared to the end of 2015.
Production contracted by 0.4% for the second quarter in
succession and construction, while more volatile, has
continued a downward trend apparent since mid-2015.
However, the industry with by far the biggest influence
on overall GDP growth is the service sector. Although it
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is the only broad sector which has consistently expanded
over the last few years, it has slowed from 0.8% quarter
on quarter at the end of last year to 0.6% in the first
three months of 2016. This deceleration is attributable
specifically to the business services and finance sectors
which slowed from 0.7% to 0.3% and, to a lesser extent
transport, storage & communications which slowed from
1.2% quarter on quarter in Q4 2015 to 1% in Q1 2016.
The confidence reading for Q2 this year for the Service
Industries shows that business sentiment in the sector is
barely positive, while gains in turnover and profits are both
slowing. Hence, as this industry accounts for the largest
part of GDP, we expect overall growth to edge down to
0.3% in the second quarter of this year.
5
Business financial performance
Fig. 3 Turnover, domestic sales and exports – average % change
% 6
Change
5
Forecast
4
Exports
Expected
Domestic sales
Expected
Turnover
Expected
3
2
1
0
-1
-2
-3
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010
2011
2012
2013
2014
2015
2016
Q2
2017
Weak growth in domestic demand but with some relief from exports
Key highlights
Sales growth has continued at broadly the same rate in
Q2 2016 as in Q1, 3.3% year on year, having slowed in
the two previous quarters. The same is true for turnover.
This is mainly driven by a weakening in domestic
demand, whereas exports are starting to improve.
Companies report that the gradual slowdown in domestic
sales, apparent through the second half of 2015, continued
into the first and second quarters of this year. This trend
is broadly consistent with ONS data. On the consumer
front, retail sales growth has eased since peaking in the first
half of last year, while output is in decline in production
and construction, and easing in services. This trend across
industries is likely to reflect both softening demand for
consumer products and services, and also a slowdown in
intra-business trade in intermediate products and services.
6
The slowdown in domestic sales, to 3.4% year on year
in Q2 this year, is clearly a concern as they accounted
for much of the growth in the UK economy in 2015.
Fortunately, companies also report strengthening export
sales, probably reflecting, at least in part, the weakening in
sterling. With exports and domestic sales taken together,
overall sales growth this quarter is very close to that in
the first three months of the year, at 3.3%. This relative
stabilisation suggests that, while there are background
factors such as the Budget and the Brexit referendum
impinging on business confidence, businesses nevertheless
continue to experience an increase in sales – but only at an
historically low pace.
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Fig. 4 Employment – average % change
% 6
Change
5
Forecast
Employment
Expected
4
3
2
1
0
-1
-2
-3
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010
2011
2012
2013
2014
2015
2016
Q2
2017
Employment growth weaker than in 2015
Key highlights
Slow growth in sales and turnover is translating into
weaker increases in employment – something that
employers expect to continue. Companies also report
modest declines in skill shortages and in staff turnover.
The period since 2012 has, for the most part, seen
sustained job creation, as companies have sought to meet
increases in orders and sales by expanding their workforces.
However, as sales growth has eased, so too has the rate of
increase in employment, falling from 2.5% year on year in
Q3 2015 to just 1.7% in Q2 2016.
With employment growth slowing down, the latest quarter
shows small falls, to around a fifth, in the percentages of
companies citing the availability of both management and
non-management skills as matters of growing concern for
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their businesses. Consistent with that, fewer companies
identify staff turnover as a rising challenge, for the second
quarter in a row. These movements are possibly being
reinforced by an increased pool of available labour.
Data from the ONS indicate that the percentage of
working-age people who are either in work or seeking
work rose to 78.3% in the three months to February 2016,
from 77.9% a year earlier.
Looking forward, employers expect their workforces
to continue growing, though at a slower rate of 1.6%,
reflecting their caution over future gains in sales and
turnover – and probably in profits too.
7
Fig. 5 Salary, input prices and consumer price growth (CPI) – average % change
% 6
Change
5
CPI inflation
Forecast
4
3
Total salary
Expected
Input prices
Expected
2
1
0
-1
-2
-3
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010
2011
2012
2013
2014
2015
2016
Q2
2017
Businesses exercising restraint over pay
Key highlights
Input prices and pay are rising slowly, but not as slowly
as the prices that companies charge their customers.
Companies’ input prices are rising only slowly, partly
because weak growth in demand is holding them back,
but also because the falls in oil and commodity prices seen
last year are clearly having an important additional effect,
tending to hold down costs. The increase in the year to
Q2 2016 for input prices is just 0.9%, while firms anticipate
increases of 1.2% over the coming 12 months.
Meanwhile, companies are being restrained over pay,
reflecting both the weakness of their sales growth and low
inflation. They report that total salary costs rose by just
2.1% in the year to this quarter, with a similar increase
expected for the year ahead.
8
One factor that may not be fully incorporated into
companies’ expectations for pay increases is the
introduction of the National Living Wage (NLW) this April.
Just under three million people will be directly affected,
but the OBR predicts that slightly more than that will
experience wage ‘spillovers’, as firms seek to maintain pay
differentials.
While the rises in input prices and labour costs are clearly
modest, there must be some concern that they are not
being matched by the prices that companies charge their
customers. These have slowed from 1% year on year in the
first half of 2015 to just 0.4% this quarter, reflecting tough
market conditions. This is impacting on profit growth.
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Fig. 6 Profit and selling prices – average % change
% 6
Change
5
Forecast
4
Profit
Expected
Selling prices
Expected
3
2
1
0
-1
-2
-3
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010
2011
2012
2013
2014
2015
2016
Q2
2017
Profit growth continues to slow as selling prices growth remains weak
Key highlights
With selling prices rising more slowly than costs,
whether labour or non-labour, companies are
experiencing downwards pressure on profit. Despite
this, spare capacity continues to diminish.
Companies report only 3.1% annual growth in profit in this
quarter, so weaker than in 2014 and 2015, and reflecting
in significant part the tendency for their selling prices to
rise more slowly than their input prices and labour costs.
One factor influencing profit growth is sluggishness in
productivity gains. The ONS estimates that output per
hour was just 0.5% higher in the final three months of
2015 than a year previously, with services up 1.1% but
manufacturing down 3.4%. In contrast, although rises
in unit labour costs were low by historical standards,
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they nevertheless grew by more than double the rate of
productivity, up by 1.3% over the same period.
On the favourable side, the amount of spare capacity
reported by firms has been on a mainly downward trend
since 2012, reflecting the gradual expansion in the
economy after the difficulties of 2012, when the euro crisis
hit hard. This will have been helpful for profitability, but in
Q1 this year there was a worrying increase in this indicator,
and hence a deviation from the trend. Fortunately the
more recent data suggest that the underlying pattern has
reasserted itself, with 49% of firms reporting that they are
operating below capacity, down from a peak of 62% in
Q4 2012.
9
Fig. 7 Investment – average % change
% 6
Change
5
Forecast
4
R&D
Expected
Capital investment
Expected
3
2
1
0
-1
-2
-3
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010
2011
2012
2013
2014
2015
2016
Q2
2017
Investment intentions weaker than in 2014 and 2015
Key highlights
Weak growth in profit is impacting on investment
plans, although the slowdown in overall demand and
background uncertainties are likely to be factors too.
Total capital spending, research and development
(R&D) and staff development are all affected.
Profit growth has eased from 4.9% year on year in Q2 2015
to 3.1% in the current quarter. This, along with the broader
economic slowdown and uncertainties such as Brexit and
the possible impact of further austerity policies on
consumer spending, is likely to be a reason why companies
are being cautious about investment. Capital spending in
the current quarter is 2.3% higher than a year earlier. That
is the same increase as reported in the first quarter of 2016
but well below the increases reported throughout 2014
and 2015.
10
Forecasts for R&D growth are, if anything, even weaker
than those for capital spending overall. Expenditure on
R&D has risen by around 2%, year on year, for four
quarters in a row, while planned spending has consistently
been slightly lower than that (with the gap likely to reflect
a tendency for budgets to be slightly overspent, on average).
The expansion of staff development budgets has also
moderated, to just 1.5% this quarter, its weakest increase
in over two years, reflecting companies’ need to restrain
cost increases. Firms’ intentions for the year ahead have not
deviated much from 1.5% to 2% over the last three years,
and this remains the case for the latest quarter, with staff
development budgets for the next 12 months predicted to
increase by an average of 1.7%.
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Trends in business confidence INDUSTRY
30
20
10
0
-10
-20
-30
UK
AVERAGE
All Production
Industries
Energy,
Water
& Mining
Manufacturing
& Engineering
Q2 2015
.................................................................
40
.................................................................
50
.................................................................
Fig. 8 Trend of business confidence by industry
Construction
All Service
Industries
Retail &
Wholesale
Transport
& Storage
Q3 2015
IT
& Comms.
Q4 2015
Banking,
Finance &
Insurance
Q1 2016
Q2 2016
Property
Business
Services
Construction & Services confidence weakens, coming into line with Production
Key highlights
The overall fall in confidence reflects Construction and
especially the Service sectors moving into line with the
Production Industries. Banking, Finance & Insurance,
Property and Business Services had the steepest
declines, with Brexit concerns perhaps adding to
underlying issues with economic growth.
While this is the first time since 2012 that overall
confidence has been close to zero, the Production
Industries have been in that position since the middle of
last year, partly because of large declines in confidence in
the Energy, Water & Mining sector, reflecting in turn the
problems created by lower oil prices. What has changed is
that Construction and, more notably, the Services Industries
have now come into line, both dropping around 13 points
to 7.4 and 0.5 for Construction and Services respectively.
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In particular, businesses in the Banking, Finance &
Insurance sector and Property sector are no longer
optimistic about economic prospects, while Business
Services companies are only very marginally positive
(1.8). These sectors have seen their output growth slow
according to the ONS data. They are also likely to be
particularly concerned about Brexit, given that they export
heavily to the EU, and/or they are heavily dependent on
inward investment from there.
The sector in which confidence has held up the best is IT
& Communications where the index is at 10.1 in Q2 2016.
This reflects the sector having much stronger expectations
for sales growth over the next 12 months than any other
industry, as well as optimism for exports.
11
Trends in business confidence REGION
Fig. 9 Trend of business confidence by region
20
10
0
-10
-20
-30
UK
AVERAGE
England
London
South East
(excl London)
South
West
East
of England
East
Midlands
West
Midlands
North
West
Q4 2015
Northern
England
Yorks &
Humber
Q1 2016
Q2 2016
Scotland
.................................................................
30
Q3 2015
.................................................................
40
.................................................................
50
.................................................................
Q2 2015
Wales
Confidence weaker across most regions, particularly London, Scotland and Wales
Key highlights
The decline in confidence is most apparent in London
and Scotland, probably reflecting the importance
of financial services in both regions – and, in the
case of Scotland, oil. Confidence is also depressed in
Wales, perhaps as a result of the recent steel industry
announcements.
The confidence index is now in negative territory in
London (-5.3), which is likely to be related to the decline
in sentiment in the Banking, Finance & Insurance, Property
and Business Services sectors. The same sectoral pattern is
likely to explain why confidence in Scotland is also negative
(-7), but with the additional impact of difficulties generated
by low oil prices.
12
Confidence in Wales is also depressed after a sharp decline,
and in this case the news about steel industry closures
is likely to have had an impact, reflecting the number
of jobs at risk and the likely knock-on impacts that the
possible closure of the Port Talbot steel works could have
on the wider Welsh economy. On the positive side, capital
investment growth was the strongest of any region in Q2
2016, possibly attributable, at least in part, to the good
news about automotive assembly work in Wales, with both
TVR and Aston Martin announcing plans for new assembly
operations.
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Trends in business confidence TYPE
Fig. 10 Trend of business confidence by company type
40
30
20
10
0
-10
-20
-30
UK Confidence
Index
All UK
Listed
FTSE
350
.................................................................
50
.................................................................
Q2 2015
All Private
Companies
Private Companies
Large
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Private Companies
SME
Confidence declines across companies regardless of size or ownership structure
Key highlights
The decline in confidence is widely spread and not
confined to a particular size or type of ownership. The
private company confidence index remained marginally
positive at 2.5, while for all UK listed firms it slipped to
-3.2 in Q2 2016.
no doubt in response to the slightly improved sales
performance, but SMEs are keeping tight control on their
capital spending. The increase in capital spending is 2.1%
year on year – so just half the rise in turnover this quarter
at 4.2%.
The weakness in business confidence in Q2 2016 is broad
based and apparent across different ownership structures
of companies and different sizes.
In contrast, FTSE 350 companies report the same growth in
sales this quarter at 2.8%, as in the previous quarter but
down from 4.6% a year ago, with neither domestic nor export
business producing any uplift in performance. However,
capital investment is stronger this quarter, continuing a
trend already in place. The 2.5% increase in capital
spending, year on year, is below the 3.4% rise in turnover
in the same period, but the gap is less marked than for
SMEs, which may be indicative of stronger underlying
finances for the large, quoted company sector.
Small and medium-sized enterprises (SMEs) report a slight
increase, compared to the previous quarter, in the rate
of sales growth, with both domestic and export sales
contributing to the rise. Nevertheless the rate of expansion
at 4.1% is still lower than through much of 2015 which
was well above 5%. Employment growth is also strong,
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13
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?’
Variable
Score
Much more confident
+100
Slightly more confident
+50
0
As confident
A score was applied to each response as shown on the right, and an average score calculated.
Slightly less confident
-50
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.
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
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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
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