UK business confidence remains strong as export hopes rise

Overall business confidence remains strong and stable, underpinned by companies’ expectations of an improvement in exports as well as an anticipated increase in investment levels, according to the latest Business in Britain report from Lloyds Bank.

The twice-yearly report, now in its 23rd year, gathers the views of 1,500 UK companies, predominantly small to medium sized businesses, and tracks the overall “balance” of opinion on a range of important performance and confidence measures, weighing up the percentage of firms that are positive in outlook against those that are negative.

Overall business confidence holds steady at strong level
The report’s overall key confidence index which looks at businesses sentiment over the coming six months, has remained stable at 43 per cent compared with January 2015. Although the latest reading is down from the survey’s high of 53 per cent 12 months ago, it remains well above the long-term average reading of 23 per cent. Expectations of employment growth and a resurgent export market suggest strong economic prospects for the second half of the year.

Business Confidence
The measure of overall business confidence is an average of the net balances of firms expecting an increase in expected sales, orders and profits over the next six months.

European export performance expected to improve
Looking ahead, 29 per cent of firms said that weaker UK demand poses the greatest threat to their business in the next six months which could explain why firms expect to increase their sales in global markets.

The net balance of exporters expecting an increase in total exports across the globe has risen by five points to 46 per cent, boosted by firms’ intentions to export to growing regions such as the Middle East and Africa.

In particular the increase in total exports has been driven by the number of exporters expecting an increase in trade with Europe in the next six months – the net balance has grown by eight points to 30 per cent showing a resurgence in EU trade.

July 2015Change from January 2015 report
Europe30%+8%
US/Canada21%+1%
Latin America6%-1%
Asia Pacific21%No Change
Middle East16%+3%
Africa11%+3%

Tim Hinton, Managing Director, Mid Markets and SME Banking, Lloyds Banking Group said: “Business confidence has remained relatively strong with encouraging expectations for sales, orders and profits for the rest of the year. This has been underlined by a bounce back in exports to Europe as well as companies' intentions to grow their presence further on the international stage.”

Over three quarters of firms plan to invest in their business
Firms’ investment spending trends are also anticipated to improve in the next six months as the net balance of businesses planning to increase capital expenditure has risen by two points, from 16 per cent to 18 per cent.

Sectors with a high net balance of increasing capital expenditure included hospitality & leisure (30 per cent) and real estate (33 per cent) while healthcare (10 per cent) and the public sector (8 per cent) were at the lower end of the scale.

When asked how much they plan to invest in the next six months just under a quarter (24 per cent) of businesses said nothing while at the higher end of the scale eight per cent of firms plan to invest over £1million. Regions and sectors that recorded higher than average results for investing nothing in the next six months included Central England (30 per cent); Wales (30 per cent); and the South West (32 per cent).

Nothing24%
£1-£10,00017%
£10,001 – £50,00020%
£50,001 – £100,00010%
£100,001 to £1m20%
£1m+8%

Hiring strength could lead to wage pressures
The net balance of companies reporting difficulties in recruiting skilled labour in the past six months has increased from 39 per cent to 41 per cent – the highest level for seven years. Meanwhile the proportion of businesses reporting that they are operating at full capacity has risen by one point to an all-time high of 47 per cent.

Both these developments point to possible pressures for firms to raise prices in the coming months.

Overall the net balance of companies planning to increase their staffing levels in the next six months fell marginally, by one point to 19 per cent but remains at a strong level, which bodes well for further job creation in the second half of the year.

Trevor Williams, Chief Economist, Lloyds Bank Commercial Banking, said: “The fact that more companies are reporting difficulties in recruiting skilled labour suggests that spare capacity in the labour market is closing, increasing the likelihood of further wage rises. Without productivity improvements, or price inflation exerting some moderating influence on wages, firms may have to respond by eventually raising the price of their goods and services.”

SECTOR PICTURE
Construction sees biggest increase in confidence while transport and communication suffer decline.

While overall business confidence has remained unchanged, sentiment across manufacturing, construction and hospitality & leisure have all seen improvements.

The biggest increase is in the construction sector in which confidence levels have risen by 14 points to 50 per cent. This is reflected by a rise in confidence for incoming orders for the remainder of the year, as the net balance rose eight points to 56 per cent having fallen 22 points in January. Similarly the net balance of construction firms anticipating an increase in their capital outlays rebounded strongly, with an 18 point gain to 24 per cent.

Confidence scores across the remaining sectors were broadly similar to the start of the year apart from transport & communications which decreased by five points to 34 per cent. This was driven by a fall in the sector's expectation of profits which declined by nine points to 32 per cent.

Tim Hinton continued: “Positively, businesses remain eager to invest in staff and infrastructure for the long term and while certain challenges remain on the horizon – such as uncertainty in the Eurozone, a potential interest rate rise and inflationary pressures – the overall outlook is strong for the UK, particularly in the construction and manufacturing sectors.

“Lloyds Banking Group is playing its part in helping Britain prosper by supporting businesses to start up, scale up and trade overseas – with our new UK Trade and Investment partnership forming a central part of this plan. Businesses have good reasons to remain confident as the long-term health of the UK continues to improve.”

REGIONAL PICTURE
Overall business confidence remains strong in most regions but Wales sees a decline

The South East, South West and East Midlands & the East recorded the largest increases of six points each with all of these regions also posting balances above the national average of 43 per cent. However confidence has slipped back in six of the eleven regions. These falls were marginal except in Wales which has seen a decrease of 14 points to 32 per cent.

Employment in the next six months by region
The net balance of businesses that anticipate an increase in headcount over the next six months rose in the South East, East Midlands & the East and Yorkshire and the Humber but fell elsewhere with the exception of the West Midlands where it was unchanged.

Declining sentiment for sales and orders in Wales has dented businesses’ confidence in their ability to hire more staff. The net balance of firms expecting to step up recruitment has fallen 21 points to six per cent from the beginning of the year and in the North East there was a corresponding 14 point decline taking the balance to minus two per cent.

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