Business Confidence Weakens in June, but Firms Remain Upbeat Compared to Rest of Europe

July 09, 2012 /

Business confidence across the UK’s private sector deteriorated in June, according to the latest Markit
Business Outlook Survey.

Worries over the impact of the Eurozone sovereign debt crisis was a key factor weighting on confidence, with companies reporting associated uncertainty and a deferral of short-term buying decisions. Access to credit was also noted as a barrier to growth, while there were concerns over the impact of government spending cuts and severe competitive pressures.

That said, UK companies are the most upbeat in Europe, with the reduction in confidence considerably less than in other EU nations. Some companies are seeking to take advantage of rivals struggles, expanding share in (albeit broadly stagnant) markets. Diversification, the introduction of new products, and plans to seek out opportunities overseas, particularly outside of Europe, were also noted as factors that could support future business growth.

Business confidence down in June, but remains higher than other European nations

The net balance of companies forecasting a rise in business activity in 12 months’ time stood at +38 in June. That was down from +46 in the previous survey and was broadly in line with the average since data were first available at the start of 2006.

Broadly similar trends were signalled for other key barometers of corporate health, such as revenues,
new orders and profits, with reductions in confidence common across manufacturing and
services.

Across Europe as a whole, sentiment has dropped markedly since February, with a notable slump in confidence in Germany and deteriorating outlooks in Italy and Spain. Confidence remained historically low in France. Companies expect weaker growth of activity, new business and revenues compared with the situation in February.

Hiring forecast, but plans for expansion less upbeat compared to previous survey

UK private sector companies signalled positive expectations for employment growth over the coming 12 months, albeit to a slightly lesser degree than in February and lower than seen prior to the financial crisis. Capital expenditure plans also remain relatively muted in June, with confidence only modestly in positive territory.

Margins are set to remain under some pressure, with companies forecasting a similar increase in operating costs 12 months ahead to the situation
earlier in the year.

In response, firms are set to raise their output charges, with overall plans similar to those seen in
February.

That said, there was some divergence by sector, with manufacturers scaling back their forecasts for output charges in the latest survey period to the lowest since mid-2009. This was largely in response to a forecasted slowdown in input prices, also to the weakest for three years.

A fall in business confidence is apparent at the global level. Growth of activity is expected by +37
percent of private sector firms on balance, down from +44 percent in February. However, sentiment remains above that recorded in late-2011. US firms continue to be among the most positive in their growth expectations, although optimism has dipped since the previous outlook survey. Confidence across the BRIC economies is robust overall, although differences are evident at the national level, with Brazilian and Indian companies notably more bullish than those in China and Russia.

Firms around the world report lower expectations regarding input cost inflation, following recent price
falls for many commodities. Output charges are set to rise at a weaker pace accordingly

Paul Smith, Senior Economist at survey compilers Markit, commented: “June’s survey indicated a deterioration in the outlook for UK plc relative to February’s findings, although companies remain relatively upbeat compared to their European counterparts.

“The European debt crisis, and associated uncertainty, remains the key factor weighing on sentiment, but closer to home access to credit and worries over government austerity continue to undermine confidence.
“Companies are nonetheless seeking ways to grow, using their own cash resources where possible, and
generally looking to overseas markets.”

 

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