In a recent newsletter, I reported on a general feeling of cautious optimism among business leaders that the UK economy was past its worst. The banking sector appears to have turned the corner and even the CBI spotted something a little brighter on the horizon in its latest Quarterly SME Trends survey, published earlier in August.
Well, the good news keeps on coming, with the latest Industrial Trends survey from the CBI and a very upbeat report of findings from the Institute of Chartered Accountants in England and Wales (ICAEW) offering yet more reasons why we should continue to be cautiously optimistic. However, both of these organisations warn of a fragile recovery ahead.
In its most recent Industrial Trends survey, the CBI says manufacturers endured another difficult month to mid-August but following months of de-stocking, their outlook for production in the next three months is the least negative since June 2008. Some 32% of UK manufacturers said they expected the volume of output to fall over the next three months, while 27% said it should increase. Although the resulting balance of -5% represents a slight fall in output, it is the least negative prediction since June 2008 (+2%).
Demand remains very weak however, with a balance of 54% of manufacturers reporting that total order books are below normal. This was a slight improvement on July's 17-year low (-59%) but marked the seventh consecutive month that orders have remained significantly below par. Export order book levels have also remained feeble, despite the relative weakness of Sterling, with a balance of 48% reporting them to be below normal.
CBI Director-General, Richard Lambert warns that manufacturers are facing weak demand at home and abroad, and their order books continue to look “anaemic”. "More positively,” he says, “expectations for manufacturing output over the coming three months are the least negative in over a year. This is partly because many firms have run their stock levels down quite aggressively over the summer, so some manufacturers are now looking to raise production. It looks like de-stocking in the manufacturing sector may be coming to an end, which offers a further sign that the UK economy is starting to stabilise."
Following heavy de-stocking over the past few months, a balance of 13% of firms said that stocks are more than adequate to meet demand, and stocks now stand at their most moderate level since July 2008 (13%).
Meanwhile, according to the latest ICAEW UK Business Confidence Monitor (BCM), confidence among business professionals has moved into positive territory for the first time in two years, providing further evidence of an improving UK economy. The BCM shows a record rise in confidence from -28.2 to +4.8, the highest since Q3 2007. Based on this, the ICAEW predicts that GDP will rise 0.5% this quarter.
Indeed, this quarter’s change is the largest quarterly improvement seen since the BCM began. This cautious optimism is underpinned by expected rises over the next 12 months in 13 out of the 14 financial performance indicators detailed within the monitor – a significant contrast to the picture earlier in the year when the majority were expected to contract. Clearly encouraged by these findings, ICAEW chief executive, Michael Izza didn’t mince his words in his analysis of the survey. “This quarter’s BCM suggests that the UK recession is at an end” he declares, adding a note of caution.
“While there is no doubt that the UK economy is on its way to recovery, we shouldn’t underestimate the challenges ahead for businesses. Businesses have taken the right actions to mitigate the impact of the downturn and are playing their part in an improving economy. Policies such as quantitative easing, the fall in interest rates and the VAT reduction have all helped improve business confidence. However, the recovery is very fragile and I would urge policy makers not to take any actions that could derail it.”
When asked, 41% of senior business professionals were more confident about economic prospects facing their business in the next year. However only 6% were much more confident, indicating that caution remains about the strength and timing of the recovery.
The monitor revealed that businesses have looked to cut costs where they can, including a reduction in the number of employees (-2.9%). Although this is the biggest ever drop, firms do not expect to make further redundancies in the next year. Staff development (-1.5%) and capital investment (-1.4%) have also been cut and stock levels continue to be closely managed. Over a quarter (26%) in the manufacturing, construction and transport sectors have stocks of raw materials and components below normal levels. IT is the most confident sector (+18.5%), followed by banking, finance and insurance (+15.9%) and property (+11.7) - the UK average is +4.8.
Across the country, business confidence rose across all regions for the second consecutive quarter. Wales is the most confident with an Index of +16.9, followed by Scotland at +15.9. Northern England is most positive of the English regions having seen a rise of over 50 points. London and South East are the most cautious (-1.1 and -0.6 respectively), reflecting a net balance of businesses who were wary about economic prospects. Michael Izza again:
“Although positive growth in the autumn seems more likely, there are concerns about the strength of the recovery. Salaries are expected to remain squeezed and with no planned recruitment there is still an air of nervousness among UK businesses. Confidence is up but those in manufacturing and engineering, as well as large businesses, remain cynical about their prospects for the future. Both are crucial to the UK economy and the signs are that the next twelve months are very much about building for the recovery.”
Les Hunt
Editor