UK desperately needs to rebalance economy

The protracted General Election campaign created uncertainty that led to businesses holding fire on their investment and growth plans, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM). Business confidence is flat this quarter, as the survey suggests turnover and profit growth over the next 12 months will be weaker than the past year.

Key findings for Q2 2015:

• The BCM Confidence Index stands at +16.2, down marginally from +16.8 – showing that outlook has stabilised in positive territory following falls in the last few quarters
• This is potentially underpinned by a slowdown in input price growth, which slowed sharply over the last quarter and is expected to do so in the next year
• Turnover and profit growth are down from last quarter, and businesses expect them to weaken over the next 12 months – the first time businesses have felt less positive about their profitability since before the financial crisis
• Employee salary growth is continuing to outstrip inflation, but only because inflation remains low, not due to any major increase in pay packets
• Exports continue to weaken, as the gap widens between it and domestic demand, making the recovery even more unbalanced and creating concerns over its sustainability
• Spare capacity has increased in the manufacturing sector, while it also struggles with access to a skilled workforce

Michael Izza, ICAEW chief executive, comments: “The prolonged period of political and economic uncertainty has clearly had a material impact on business confidence in the last few months with investment, hiring, wage increases and exports all being on pause. With a clear majority, the incoming Government now has to move quickly to get the UK economy moving forward again.

“The first priority should be to grow our exports. The UK desperately needs to rebalance the economy. As the BCM reveals, the gap between our exports and domestic demand is widening even more. While growth built on domestic demand is fine for the moment, soon the benefits of low inflation and cheaper petrol will evaporate. It is crucial that we look to boost our exports both inside and outside the EU. Businesses need to think global from the start, and we need to make it easier for them to trade internationally.

“The second priority is the UK’s relationship with Europe. There is an increasing urgency to negotiating reform and holding a referendum. The risk is that, for the next two years, the UK is effectively closed to inward investment from countries within and outside the European Union. That’s why the Prime Minister must agree a package of reforms without delay and put that to the British people in a referendum as soon as is practically possible.”