Q2 · 2017
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Q1
Q4
Q2
Q3
UK Business Confidence Monitor
Q2 2017
OVER ALL CONFIDENCE
OVER ALL SALES GROWTH
Input price grow th
+6.7
turns positive
to increase
accelerates
Business confidence turns
positive for the first time
since the EU referendum,
but is still weak.
Export growth to
strengthen, together with
domestic sales – despite
an expected squeeze on
the consumer.
Input price inflation
accelerates. Firms expect
to pass some of this onto
customers, while controlling
other business costs.
Employment grow th
C apital investment
grow th
to moderate
re vised up
Businesses are not
intending to raise the pace
of employment and wage
growth, or spending on
staff development.
Firms are gradually
revising up their plans
for capital expenditure
despite widespread spare
capacity. R&D growth to
remain modest.
RETAIL & WHOLESALE
confidence still
downbeat
Confidence index improves
across most sectors, with
just Retail & Wholesale
and Transport & Storage
still negative.
Implications
•• The increase in confidence, back into
positive territory, comes with mixed
indicators. Input prices continue to rise
but companies are still predicting sales
and profit growth. This is being achieved
by passing on part of the cost increase to
customers together with controlling labour
costs and restricting investment.
•• Sectors furthest away from the consumer
display the highest confidence and the
Retail sector the lowest, which can be
attributable to a reduction in consumer
purchasing power as cost increases
outstrip wage growth.
•• Surprisingly, outside the Manufacturing
sector export sales growth is relatively
constrained while domestic sales growth
continues to be strong. This could indicate
hedging is still impacting companies or
that the effect of a lower pound is less than
anticipated. The initial reaction following
the Brexit vote has passed and companies
are now getting on with business. However,
uncertainty with Brexit negotiations
means they are still very cautious and are
minimising expenditure in uncertain times.
Business investment and other discretionary
expenditure continues to be weak.
•• As the general election approaches political
parties need to develop policies that
encourage business investment and provide
infrastructure and skills enhancements that
underpin an effective industrial strategy.
Q2 · 2017
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INTRODUCTION
Business confidence
Business financial performance
Trends in business confidence: Industry
Trends in business confidence: REGION
Trends in business confidence: TYPE
ABOUT BCM
OUR ECONOMIC
REPORTS
Business confidence in Q2 2017
BUSINESS CONFIDENCE TURNS
POSITIVE, BUT IS STILL WEAK
Fig. 1 Trend in UK business confidence
40
35
32.3
31.7
30
28.6
24.0
25
20
22.4
16.8 16.2
16.7
15 13.7
10
The ICAEW UK Business Confidence Monitor
(BCM) Index is back in positive territory for the
first time since the EU referendum. At +6.7, it
is up 15 points this quarter on Q1 2017.
37.2 37.3
12.8
12
15.6
11.4
8.1
5
1.1
0
36%
6.7
4.2
more confident
0.8
-5
-10
-15
-9.7 -9.3
-10.2 -9.8
-20
36%
-8.7
38%
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
2011
2012
2013
2014
36%
more confident
36%
more confident
38%
as confident
38%
as confident
2015
2016
more confident
38%
as confident
26%
26%
less confident
less confident
COMPARED to the l ast 12 months
26%
Likely reasons for the improvement include
positive news about the economy published
in that period. GDP growth remained
steady during the second half of 2016,
rather than turning negative as some feared
might happen, after the referendum. The
unemployment rate has continued to edge
down to a record low (4.7% in the three
months to February 2017), and figures from
the Organisation for Economic Co-operation
and Development (OECD) suggest that
foreign direct investment into the UK rose
sharply in 2016. Also on the positive side,
firms expect to achieve increases over the
year ahead in both sales volumes and the
prices they charge customers.
compared to the last 12 months
2017
as confident
26%
Against this background, input costs are
rising, and overall sentiment is still weak by
historical standards, with a close gap between
compared to the last 12 months
the number of companies that are more
confident about general economic conditions
over the coming year and those that are less
so. Companies in sectors that sell primarily to
consumers are particularly cautious, probably
reflecting the difficult first quarter that the
official retail sales figures reveal.
less confident
Q2 · 2017
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INTRODUCTION
Business confidence
Business financial performance
Trends in business confidence: Industry
Trends in business confidence: REGION
Trends in business confidence: TYPE
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OUR ECONOMIC
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Q2 · 2017
Business confidence in Q2 2017
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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
% 1.5
INTRODUCTION
1.0
Business confidence
0.5
Business financial performance
0.0
Trends in business confidence: Industry
-0.5
-1.0
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
2011
2012
2013
2014
2015
2016
2017
GDP GROW TH SLOWS TO 0.3% IN Q1. RISING OPTIMISM IMPLIES Q2 COULD BE STRONGER
The preliminary estimate of GDP from the Office
for National Statistics (ONS) indicates that the UK
economy eased from 0.7% quarter on quarter in
Q4 2016 to just 0.3% in Q1 2017. However, the
improvement in business confidence indicates
that Q2 growth might be better, with the index
suggesting a rise of 0.5%.
The first quarter slowdown came as little surprise,
given the 1.4% contraction in retail sales volumes
already reported in the period. That contributed
to a 0.5% fall in distribution, hotels and
restaurants output, while the transport, storage
and communications sector also saw a decline of
0.2%. Against that, business services and finance
saw output gains averaging 0.7%. Even so, overall
growth in services slowed from 0.8% quarter on
quarter in Q4 2016 to just 0.3% in Q1 2017.
Manufacturing, in contrast, maintained
momentum, growing by 0.5% and outperforming
services for the second consecutive quarter,
thanks in particular to the motor industry.
Looking ahead this pattern is likely to continue,
with consumer sectors facing challenges as a
result of rising inflation and static nominal wage
growth, plus an ongoing squeeze on welfare
payments. Exporters, on the other hand,
should continue to benefit from a weaker than
normal sterling.
Trends in business confidence: REGION
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REPORTS
Q2 · 2017
Business financial performance
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Fig. 3 Domestic sales, exports and overall sales – annual % change
Exports
Domestic sales
Overall sales
%6
Forecast
INTRODUCTION
5
Business confidence
4
Business financial performance
3
2
Trends in business confidence: Industry
1
0
-1
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
2011
2012
2013
2014
2015
2016
2017
Q2
2018
BOTH EXPORT AND DOMESTIC SALES EXPEC TED TO IMPROVE
The rise in sales volumes over the past year is
higher in Q2 2017 than it has been since the end
of 2015, and expectations are for the trend to
strengthen further. Improvements are predicted
in both domestic and export sales.
Hopes for faster domestic sales growth in the
year ahead are consistent with the gains that have
occurred in business confidence. This comes
despite widespread expectations of a squeeze on
consumers, as inflation outpaces wages and as
cuts are made to benefit payments. The prospect
of continuingly low interest rates is likely to be
part of the reason for the optimism.
Export growth is also predicted to strengthen,
particularly in the Manufacturing and IT &
Communications sectors. This comes after
a period in which exports have shown little
response to the fall in sterling post-referendum.
Exports are 3.1% up this quarter on a year ago,
which is only modestly higher than the 2.6%
increase over the 12 months to Q2 2016. It is
likely that some firms have taken the benefits
of a lower currency to improve margins rather
than grow sales, while others will have been
adversely affected by sterling’s depreciation
due to rising costs.
Trends in business confidence: REGION
Trends in business confidence: TYPE
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Q2 · 2017
Business financial performance
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Fig. 4 Input prices, selling prices and profit growth – average % change
Input prices
Selling prices
Profit
%6
Forecast
5
INTRODUCTION
Business confidence
4
Business financial performance
3
2
Trends in business confidence: Industry
1
0
-1
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
2011
2012
2013
2014
2015
2016
2017
Q2
2018
COMPANIES TO KEEP GROW TH IN EMPLOYMENT BELOW 2% AND CONTROL OTHER L ABOUR COSTS
Input prices are rising at their fastest rate since
Q3 2012. However, firms do not expect a further
acceleration, and are planning to keep other
costs under control. They are also looking to
raise selling prices, allowing profits to rise
alongside sales.
The 2.3% increase in input prices in the year to Q2
2017 is more than double the 0.9% pace of a year
ago. It reflects both higher commodity prices and
the fall in sterling. Crude oil prices rose from $30
a barrel in January 2016 to $55 a barrel in early
2017, while sterling depreciated from $1.42 to
$1.26 over the same period.
Both trends may now be moderating, with
sterling having regained some ground and oil
prices flattening off. Companies predict that their
selling prices will increase by 1.3% in the year
ahead, compared to 1% over the last year to Q2.
Meanwhile, they are seeking to control other costs
such as salary growth – real wages are expected
to fall for the first time since 2013, as inflation
accelerates.
Taken together with stronger sales, these
factors point towards a modest improvement
in profits growth in the year ahead, compared
with recent trends.
Trends in business confidence: REGION
Trends in business confidence: TYPE
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Q2 · 2017
Business financial performance
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Fig. 5 Number of employees, total salary and staff development budgets
Number of
employees
Total salary
Staff development
budget
% 3.0
Forecast
2.5
INTRODUCTION
Business confidence
2.0
1.5
Business financial performance
1.0
0.5
Trends in business confidence: Industry
0.0
-0.5
-1.0
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
2011
2012
2013
2014
2015
2016
2017
Q2
2018
COMPANIES TO KEEP GROW TH IN EMPLOYMENT BELOW 2% AND CONTROL OTHER L ABOUR COSTS
Employment grew by 1.9% in the year to Q2
2017, and businesses expect it to increase by
the same amount (1.8%) over the coming year,
despite anticipated faster sales growth.
Only one sector shows a significant acceleration in
future job creation: IT & Communications, with a
rise from 2.3% in the year to Q2 2017, to 3.5% over
the next 12 months. These firms also have by far
the strongest expectations for sales volumes, at
over 8% growth.
In contrast, both the Banking, Finance &
Insurance and Construction sectors are looking
to reduce the rate at which they hire new staff,
with concerns over Brexit likely to be strong
factors for these firms. The slowdown in the
residential property market is potentially the
cause of weaker headcount growth expectations
in the Property sector.
The implication of restrained job creation is that
faster sales growth will need to be made through
productivity gains. The long-term success of this
will require investment of all types, including staff
development budgets. However, the 1.7% rise in
the year ahead is in line with last year’s rates while
wage growth is to remain the same at 1.9%.
Trends in business confidence: REGION
Trends in business confidence: TYPE
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Q2 · 2017
Business financial performance
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Fig. 6 Capital investment and Research & Development (R&D) – average % change
Capital investment
R&D
3.5
Forecast
INTRODUCTION
3.0
Business confidence
2.5
Business financial performance
2.0
1.5
Trends in business confidence: Industry
1.0
0.5
0.0
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
2011
2012
2013
2014
2015
2016
2017
Q2
2018
COMPANIES PLAN INCREASED CAPITAL SPENDING DESPITE WIDESPREAD SPARE CAPACITY
Capital spending growth has been on a
downward trend since late 2014. However, it has
now levelled off, and companies’ expectations
are improving.
The easing off in capital and R&D investment
since 2015 reflected widespread economic
uncertainty and, linked to that, weakening business
confidence. But with the latter now rising, and
with firms anticipating improvements in both sales
and profits, it is not surprising that the growth in
capital spending has picked up. Companies are
spending 2.6% more in Q2 2017 than a year earlier.
Particularly large rises are evident in the Property
and Construction sectors (up 4.4% and 4.3%
respectively) and also in IT & Communications (3.0%).
With confidence rising, plans for the coming years’
capital and R&D investment are now converging
on the rates actually achieved recently; capital
spending 2.1%, while R&D a more modest 1.6%.
This is despite the fact that 52% of firms
(and 71% of manufacturers) say that they are
working below capacity. This suggests that
investment plans are being driven at least in
part by a need to introduce new technology,
and not just by a requirement to replace or
expand existing equipment.
Trends in business confidence: REGION
Trends in business confidence: TYPE
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Q2 · 2017
Trends in business confidence: INDUSTRY
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Fig. 7 Business confidence by industry
Q2 - 2016
Q3 - 2016
Q4 - 2016
Q1 - 2017
Q2 - 2017
30
INTRODUCTION
25
Business confidence
20
15
Business financial performance
10
5
0
Trends in business confidence: Industry
-5
-10
-15
Trends in business confidence: REGION
-20
-25
-30 UK AVERAGE All Production
Industries
Energy, Water
& Mining
Manufacturing
& Engineering
Construction
All Service
Industries
Retail
& Wholesale
Transport
IT &
Communications
Banking,
Finance
& Insurance
Property
Business
Services
CONFIDENCE IS POSITIVE IN ALL BUT T WO SEC TORS WITH EXPORT GROW TH A FAC TOR
Confidence has improved in all sectors compared
to Q1 2017, and it is positive in all except
Transport & Storage and Retail & Wholesale. It
is highest in those industries with the strongest
export expectations.
of firms that feel most confident about business
conditions over the coming year. In addition,
Energy, Water & Mining companies are hopeful
of their ability to raise prices next year for the first
time since 2014, even if only marginally.
Export growth is predicted to accelerate
particularly in the production sectors (Energy,
Water & Mining, and Manufacturing), and in IT &
Communications. These are also the collection
Manufacturers’ confidence is likely to be linked
to the favourable trends in domestic sales over
the last year, particularly in the car sector, where
the Society of Motor Manufacturers and Traders
reports registrations up 6.2% year on year in the
first three months of 2017.
Retail & Wholesale’s confidence index is still
marginally negative this quarter – not surprising
given higher input prices and a fall in retail sales
in Q1 2017 according to the ONS. The Transport
& Storage sector has also failed to enter positive
territory as it is particularly affected by the upturn
in fuel prices.
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Q2 · 2017
Trends in business confidence: Region
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Fig. 8 Business confidence by region
Q2 - 2016
Q3 - 2016
Q4 - 2016
Q1 - 2017
Q2 - 2017
30
INTRODUCTION
25
Business confidence
20
15
Business financial performance
10
5
0
Trends in business confidence: Industry
-5
-10
-15
Trends in business confidence: REGION
-20
-25
-30
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
Trends in business confidence: TYPE
CONFIDENCE IS POSITIVE IN ALL BUT ONE REGION
Confidence turns positive across all regions this
quarter, with exception of the West Midlands. In
the North West it is particularly strong.
The strength of confidence in the North West is
broadly based, built upon a large rise in export
growth (from 0.5% a year ago to 3.4% in Q2)
and a similar improvement in domestic sales
(from 2.3%, to 4.4%).
In the South West, companies are not only positive
about general business conditions, but are also
reporting strong financial performance results,
not least growth in export sales over the past year
(5.2%). The region’s specialisms include aerospace,
digital technologies and the motor industry.
The West Midlands alone remains marginally
negative. It is facing sharp rises in input prices,
at 3.3% over the past 12 months, while 20% of
firms in the region are increasingly concerned,
compared to a year ago, about their ability
to expand into new markets. Component
manufacturing is particularly important in the
West Midlands, with firms selling both locally
and to customers across the EU.
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Trends in business confidence: T ype
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Fig. 9 BUSINESS CONFIDENCE BY COMPANY TYPE
Q2 - 2016
Q3 - 2016
Q4 - 2016
Q1 - 2017
Q2 - 2017
30
INTRODUCTION
25
Business confidence
20
15
Business financial performance
10
5
0
Trends in business confidence: Industry
-5
-10
-15
Trends in business confidence: REGION
-20
-25
-30
UK Confidence Index
All UK Listed
FTSE 350
All Private Companies
Private Companies - Large
Private Companies - SME
PRIVATE FIRMS GENER ALLY MORE CONFIDENT THAN LISTED
Confidence is positive for listed companies,
but only marginally so, while privately-owned
businesses show a clear return to positive
confidence.
Listed companies are positive about economic
conditions, but their confidence index score of
+1.8 is below the aggregate +6.7 in Q2 2017.
They are experiencing a modest slowdown in
domestic sales (from 3.8% a year ago to 2.6% in
Q2 2017) while export growth of 2.5% represents
no real improvement on preceding quarters
despite a more favourable sterling. That said,
their confidence is nevertheless greatly improved
compared with Q1 2017.
Privately-owned firms, both large and small-tomedium sized, have a more positive balance
of companies reporting an improvement in
confidence, at +9.7. Confidence among larger
private companies in particular has improved a
lot since a large drop post-referendum. There
has been a decline in firms citing marketplace
competition as a matter of growing concern, from
40% a year ago, to 33% in Q2 2017. The same
percentage report that lack of customer demand
is a source of rising difficulties for themselves.
Trends in business confidence: TYPE
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Q2 · 2017
About BCM
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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 1,000 telephone interviews each
quarter with ICAEW members working in industry
and commerce. Interviews gather 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 ensure the
profile of each quarter’s survey sample accurately
represent the UK economy (by value) for company
size (no. of employees), regional location and
industry sector.
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?’
Further details on methodology are available
upon request.
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.
They specialise in premium quality, customtailored 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 in-depth interviews.
INTRODUCTION
Business confidence
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Trends in business confidence: Industry
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Q2 · 2017
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