South East: Business confidence slips as global growth concerns remain, says Lloyds Bank

- South East business confidence falls from record high in July

- Business expectations for sales and orders suggests that the pace of economic activity will continue but at a more modest pace in the first half of 2015

- Businesses urged to explore export markets beyond Europe and the US as global recovery remains volatile.

Business confidence in the South East has slipped in the past six months, partly due to renewed concerns on global growth, according to the latest Business in Britain report from Lloyds Bank.

The twice-yearly report, now in its 23rd year, gathers the views of more than 1,500 UK 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.

Since the last report in July 2014, the Business in Britain report’s key confidence index has decreased by 10 points to 46%. This was largely driven by decreases in firms’ expectations of profits and orders over the next six months – reflecting a more cautious outlook for continued economic growth in 2015.

Ian Patterson, area director for SME banking in the South East, Lloyds Bank Commercial Banking, said: “Although business confidence has slipped back, it is important to remember that the UK recovery remains on track. South East companies should continue to think about their priorities and how they can best grow their businesses as we start the New Year.”

Optimism about expected orders, sales and profits has waned a little

Expectations for total sales, orders and profits in the next six months - the three key indicators of business confidence - have all dropped but remain above their long-term average.

Over half of businesses in the South East (55%) said that they expect their orders to increase during the first half of the year, while less than one in 10 (8%) that anticipate a decline. The resulting 47% overall net balance represents a nine point decrease from July 2014.

Similarly, 62% of businesses stated that they think their sales will increase in the next six months, while less than a tenth (8%) expect a drop, leading to a 53% overall balance, a five point decrease from the middle of the year.

This decline in optimism for sales and orders has taken its toll on expectations for profits. After rising in recent surveys, the net balance of firms expecting profits to rise fell by 11 points to 37%. Less than half of businesses (49%) expect their profits to increase in the next six months while 12% think they will fall.

Despite indices falling back from the previous survey, these figures taken together indicate that economic growth will continue at a moderate pace in the first half of 2015.

Prospects for overseas trade to Europe suffers decline

The weaker optimism regarding sales, orders and profitability for the next six months is mirrored by dampened expectations for exports among South East companies. The net balance of firms in the region expecting an increase in exports over the next six months fell by 18 points to 28%. Just over one in 10 businesses (11%) expect their exports to drop while more than a third of businesses (39%) anticipate an increase.

This was down from 51% at July 2014 and reflects the continuing uncertainty in the global marketplace.

A large part of the decrease was due to firms’ expectations on eurozone exports. The net balance of companies that expect to increase their exports to Europe declined by 15 points to 25%.

Firms’ expectations on increasing their exports beyond Europe did not suffer as big a decline. The net balance of companies expecting an increase in exports Asia/Pacific held firm at 15%.

Hiring and investment intentions remain relatively strong

Firms continue to be relatively upbeat about recruitment prospects with the balance of businesses expecting to hire more staff over the next six months increasing by four points to 18%.

Over a quarter of businesses (27%) said that they will increase staff numbers during the first half of the year and under one in 10 (9%) said they planned reductions.

Similarly, the balance of companies reporting challenges in the recruitment of skilled workers has lessened with a seven point decrease to 36%.

Expected capital expenditure has seen an increase. The report shows that under a third of businesses (29%) expect to increase their capital expenditure over the next six months – up from 27% six months ago - while more than one in 10 (14%) are planning cutbacks – up from 10%.

Patterson continued: “The uncertainty in Europe and across the globe more widely in the second half of the year has clearly affected businesses’ intentions to export. While some economic factors will be beyond their control, businesses need to explore the growth economies beyond the traditional export markets of Europe and the US.

“The employment and capital investment figures are encouraging, implying that firms remain eager to invest in infrastructure and staff for the long term. The right people and resources will help secure a more sustainable income and help them grow on the international stage.”

The economic outlook for 2015

Trevor Williams, chief economist, Lloyds Bank Commercial Banking, said: “Increased volatility in global equity markets and disappointing economic news from the eurozone in the second half of 2014 has undoubtedly contributed to lower business confidence for this survey.

“However the fall in oil and other commodity prices will help ease cost pressures and the expected increase in headcount bodes well for the UK. There are still concerns about global growth prospects but given other indicators from the report, I expect UK activity to mature into a more sustainable pace of growth over the coming months.”

The 'Business in Britain' survey has been carried out twice a year since 1992. Responses from 1,503 firms were collated in November 2014 by BDRC Continental.

- 69% of the responses came from businesses with an annual turnover of less than £10 million.
- 7% of the responses came from businesses with an annual turnover of between £10m and £15m.
- 24% of the responses came from businesses with an annual turnover of more than £15m.

The full report can be downloaded here.