Business confidence has hit a 22-year high according to the latest ‘Business in Britain’ report from Lloyds Bank, fuelling hopes of continued economic growth in the second half of 2014.
The survey’s key ‘Business Confidence Index’ shows that firms are continuing to grow in confidence, driven by expectations of stronger profits, orders and sales over the next six months.
The twice-yearly report, now in its 22nd year, canvasses the views of 1,500 UK businesses and tracks the overall “balance” of opinion, weighing up the percentage of firms that are positive in outlook against those that are negative.
Since the last report in January 2014, the confidence index has increased by 8 points to 53 per cent, the fifth consecutive increase for the survey. This was mainly driven by firms’ expectations of increasing profits and has surpassed the previous survey high of 46 per cent recorded in January 1994 – reflecting businesses’ renewed optimism for the UK economy.
Tim Hinton, Managing Director, SME and Mid Markets Banking, Lloyds Banking Group said: “This upturn in confidence marks an all-time survey high. We hope that it will lead to a further improvement in economic activity for the second half of 2014 to allow British businesses to grow and prosper.”
Sales, orders and profits likely to continue strong momentum
Expectations for total sales, orders and profits in the next six months, the three key indicators of business confidence, have all climbed further above their long-term averages and now stand at record highs.
Almost two-thirds of businesses (61 per cent) said that they expect their orders to increase during the second half of the year; compared to one in 20 (five per cent) that anticipate a decline. The resulting 56 per cent overall net balance represents a seven point increase from January 2014.
Similarly, almost two-thirds of businesses (65 per cent) stated that they think their sales will increase in the next six months, while under a tenth (seven per cent) expect a drop, leading to a 58 per cent overall balance. This is a seven point increase from the beginning of the year.
The balance of firms anticipating greater scope for increasing prices over the next six months has increased marginally by one point to 24 per cent. This is the highest balance since 2008 when it averaged 33 per cent. Firms’ hopes of raising prices may help to underpin their expectations of stronger profits over the next six months. The net balance of firms expecting rising profits increased for the fifth consecutive survey, to 46 per cent, an increase of eleven points since January. Taken together, these forward-looking indicators suggest that the current momentum of economic growth is set to continue.
Prospects for overseas trade on the up
The buoyant optimism regarding sales and orders for the next six months is mirrored by rising expectations for exports despite the recent increases in sterling against the currencies of the UK’s main trading partners.
The net balance of businesses expecting to increase their exports over the next six months rose by three points to 51 per cent. Just over one in 20 businesses (six per cent) expect their exports to drop in the next six months compared to more than half of businesses (57 per cent) who anticipate an increase.
Over two-fifths (45 per cent) of businesses expect to grow their total exports to Europe during the first half of the year, with 8 per cent expecting a fall, resulting in an overall balance of 37 per cent saying exports to the Continent will rise. This is an increase from six months ago when the overall balance expecting an increase was only 31 per cent.
This pickup in expectations for European exports reflects an upswing in activity in Europe since the second quarter of 2013. UK companies are most confident about expected sales to Europe (37 per cent), followed by US and Canada (26 per cent) and Asia (22 per cent).
Hiring and investment intentions continue their ascent
Firms continue to be upbeat about recruitment prospects with the balance of businesses expecting to hire more staff over the coming six months rising for the fifth consecutive time. Almost a third of businesses (31 per cent) said that they will increase staff numbers during the second half of the year and almost one in ten (nine per cent) said they planned reductions.
The overall net balance of 22 per cent expecting to boost staff numbers is a rise of five points from January this year and a fresh survey high. This increase in the net balance points to further employment gains as the recovery matures.
At the same time, the balance of companies reporting challenges in the recruitment of skilled workers continues its post-crisis recovery with a four point increase to 36 per cent. This was the fourth consecutive rise and suggests a potential strain in the market for skilled labour which could put pressure on pay growth. However the index is still well below its 1997-2007 readings which averaged 47 per cent.
Expected capital expenditure is also on an upswing with the net balance rising for the fifth survey in a row. The report shows that a third of businesses (33 per cent) expect to increase their capital expenditure over the next six months while just over one in ten (11 per cent) are planning cutbacks. This results in a net balance of 22 per cent planning to ramp up investment in the second half of the year, which is an increase of six points from January this year and the highest level witnessed since 1994. The net balance has been in positive territory for four consecutive survey periods, for the first time since 2006.
Tim Hinton continued: “It’s encouraging to see that businesses are looking to export more and that they feel more bullish about Europe as it emerges from recession. The survey implies that they are eager to invest more in infrastructure and staff, which we hope will result in them developing and growing on the international stage.”
All company sizes set to do well – confidence improving the most for small business
Business confidence improved the most among companies with annual turnover of below £1m. The net confidence balance for these firms is up fifteen points at 49 per cent. The strongest levels of confidence were for firms in the £2-5m and above £15m turnover brackets, both at 58 per cent. However, the balance was unchanged for companies with a £1-2m turnover at 51 per cent.
Confidence at record highs across all sectors
Business confidence is at the highest levels since the survey began across all sectors. The strongest reading is in the construction sector, with a 19 point increase to 59 per cent, closely followed by manufacturing at 58 per cent despite a rise of only 1 point. The transport & communications sector has seen a notable rise of 11 points to 56 per cent. The hospitality & leisure sector has the lowest net balance, though at 49 per cent it is still consistent with strong activity in the coming six months.
There are also robust levels of activity in the construction and manufacturing sectors as the net balance of companies who are set to increase capital spending in the next six months increased significantly by 17 and 14 points to 30 per cent and 32 per cent, respectively. Similarly the net balance of survey participants in the construction sector who are seeking to employ more staff over the next six months surged by 24 points to 37 per cent, mirroring a sharp increase in expected orders.
Business confidence improves across the UK
Business confidence was strongest in the South West, up 16 points to 58 per cent, followed by the North East & Yorkshire and the East Midlands & East, both at 57 per cent. It was the weakest in the North West and Wales, at 45 per cent and 48 per cent, respectively while overall confidence in London stood at 51 per cent, all below the national average of 53 per cent. Despite differences, the average level of confidence increased from 45 per cent in the last survey to 53 per cent which is in line with robust levels of economic activity across all regions.
The economic outlook for the second half of 2014
Trevor Williams, Chief Economist, Lloyds Bank Commercial Banking, said: “Business sentiment is at historically record highs and hence there is a healthy appetite to invest as businesses are much more confident about their future trading prospects. Moreover, the survey suggests that the current momentum in employment is set to continue over the second half of the year. These developments augur well for economic growth over the remainder of 2014.”