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Light at the end of the tunnel gets closer

The Institute of Chartered Accountants in England and Wales (ICAEW) predicts third-quarter GDP will rise by 0.5 per cent after five quarters of declining output.

GENERAL MERCHANDISE

Light at the end of the tunnel gets closer

The latest ICAEW UK Business Confidence Monitor (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.

This quarter's change is the largest quarterly improvement seen since 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 BCM. This is in contrast to the picture earlier in the year when the majority were expected to contract.

Michael Izza, Chief Executive of the ICAEW, said: “This quarter's BCM suggests that the UK recession is at an end. 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), compared to the UK average of +4.8. The Banking sector in particular has shown a remarkable upturn given the turmoil of the last two years. Confidence has also returned to the Property sector, a reaction to the more positive signs in the housing market. The least confident sector is Health and Education (-12.2%) which is finally facing the realisation of expected cuts in the public sector.

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 concludes: “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.”

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