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Business confidence rises

23 November 2009

Confidence among business professionals has improved in the last three months according to the latest ICAEW UK Business Confidence Monitor (BCM).

It shows that companies are starting to look to the future, with key financial indicators such as planned investment and recruitment showing tentative growth. Despite these, the recovery is still fragile and faces a number of potential risks.

The Business Confidence Index improved for the third successive quarter to +24.6, up from +4.8 in Q3 2009 and -36.3 a year ago. Nearly half (49%) of senior business professionals were slightly more confident about economic prospects facing their company in the next year. Only 9% were much more confident, highlighting the fragility of the recovery.

Michael Izza, Chief Executive of the ICAEW, said:

“The UK economy is undoubtedly in better shape than this time last year and the improvement in confidence shows the relief businesses feel to have kept their heads above water. Although we are still on track for a return to economic growth, the recovery is very fragile and will take time.

"Tightening of fiscal policy, the return to the 17.5% VAT rate, continued difficulties accessing finance and a budget Christmas by consumers are all potential threats to this recovery.”

Several of the key financial indicators tracked in the BCM have seen improvement. Firms still report decline in profits, turnover and sales over the last year but the rates of decline have eased and businesses expect a reasonable rate of growth to return.

Exports have held up, supported by improved UK competitiveness with the weak pound. Exports are expected to grow by 3.3% over the coming 12 months – the strongest outlook in a year.

Over the next twelve months capital investments are planned to increase by 1.6%, a smaller level compared to pre-downturn but the largest forecast increase since Q1 2008. Firms also expect to grow their workforce by 0.8% and the average total salary is predicted to increase but at a low level (1.2%) as businesses use these methods to control costs.

Stock levels are to stabilise after months of reduction. Despite these positives, late payment from customers (37%) and access to capital (32%) are still a greater challenge compared to a year ago. Customer demand remains a major concern.

Across the sectors, Banking, Finance and Insurance is much more confident than other industries with an index of +37.6. Manufacturing and Engineering follow seeing a big increase from -1.1 in Q3 2009 to +26.7 this quarter. Business Services and Property were also above the average.

The Construction industry continues to feel the effects of the downturn the most with an Index of +8.9, 15.7 points below average. Retail and Wholesale recorded its third consecutive improvement although this has slowed. As a more cautious consumer emerges, Christmas 2009 may be a tough one for the high street.

Scotland was the most confident about the next 12 months when compared to the rest of the UK (+35.2), followed by East of England (+31.2). London and the South East recorded the largest gains in confidence while Yorkshire and Humberside was the least confident region at +14.4.

Michael Izza concludes:

“Businesses are backing the recovery but banks are not. Access to capital continues to be a problem despite government reassurances and a willingness to invest by companies. We cannot emphasise enough the fragility of the recovery.

This month's Queen's Speech and the upcoming Pre-Budget Report are effectively the starting guns for next year's General Election. Policy makers need to be careful that the measures they announce support the recovery rather than unintentionally threaten it.”

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