Business optimism at lowest point for four years

Construction improves slightly, but a weakening pound and political and economic uncertainty continue to dampen sentiment November 14, 2016 / Isla MacFarlane
Business optimism at lowest point for four years

The latest Markit Business Outlook survey reveals that optimism among UK companies has dipped to its lowest in over four years.

Central features of the weaker outlook are business uncertainty surrounding the forthcoming Brexit negotiations between the UK and EU and an expected pick-up in inflationary pressures stemming from the weakening pound.

The headline figure from the survey is the net balance of companies expecting growth or contraction in their business activity over the next 12 months. The net balance (the difference between the percentage of optimistic and pessimistic companies) has fallen to +38% in October, from +40% in June, the lowest since June 2012. Optimism has now dimmed continuously since peaking in February 2014, with the exception of an improvement in the June 2015 survey following the General Election.

“UK business optimism has deteriorated to its lowest since the summer of 2012, edging down further since the Brexit vote,” said Chris Williamson, Chief Business Economist at IHS Markit. “This in part follows a broader global malaise, with worldwide business confidence slipping to its lowest for over six years amid growing political uncertainty, but also reflects worries closer to home about the potential impact of Brexit on the economy.

“Brexit dominated the threats to business listed by companies, alongside worries about escalating political uncertainty at home and abroad. Rising costs, in turn often linked to the weakened exchange rate, were also a major source of concern. Many companies continue to report that opportunities outweigh the threats to their businesses, though much of course will depend on how the Brexit roadmap develops.”

By sector, manufacturers retain the most positive overall outlook but have seen the biggest drop in sentiment since the summer, with a net balance of +47% of goods producers expecting output to rise over the next 12 months. Service sector expectations are little-changed since June (+37%), while the construction outlook has improved slightly (+34%).

Inflationary pressures in the UK economy are forecast to intensify in 2017, mainly reflecting the expected weakness of sterling. The net balance for input prices has risen to +46%, the second-highest in the global outlook survey (behind Brazil, +47%) and the most elevated in three years. Moreover, the increase in the balance since February is the largest observed among all countries monitored.

By sector, service providers face the greatest cost pressures (+49%), while the manufacturing input prices net balance has more than doubled to +40%.

An erosion of consumer purchasing power due to inflation and the continued impact of the National Living Wage are set to place upward pressure on firms’ labour costs. The staff costs net balance has risen to +55%, the highest in a year.

With cost pressures set to heighten, companies are expecting to raise their prices on average over the next 12 months. The net balance for output prices has risen to +40%, the highest since February 2014 and the most elevated of all countries in the global survey.

Greater cost pressures and the weaker outlook for activity are set to weigh on profitability. The profits net balance has declined to +17%, the lowest since October 2011.

Private sector companies in the UK expect to expand their workforces on average over the next 12 months. The employment net balance has edged up since June to +19%, but this is still the second-lowest outcome since February 2013 and signals a less bullish approach to hiring than the trend shown over the past three years.

Expectations regarding capital spending have remained unchanged from the subdued reading seen in the June survey, reflecting ongoing uncertainty around the terms of Brexit both before and after the vote. The net balance is just +7%, the joint-lowest in four years. Service sector companies are the least optimistic of increasing their capex spend over the next 12 months, although manufacturers have reported slightly stronger expectations, possibly linked to export opportunities resulting from the weak pound.

Did you like this? Share it: