Business in Britain A Survey of Business Opinions and Trends | 40th edition July 2012

Contents 01 Introduction 02 Recent trends in the SME market 08 The industrial picture 10 The regional picture 12 Analysis by size of firm

A Survey of Business Opinions and Trends Analysis and text by: Hann-Ju Ho, Economic Research Lloyds Bank Wholesale Banking & Markets 10 Gresham Street, London EC2V 7AE, Tel (020) 7158 1745. Email: [email protected] With assistance from Adrian Hughes. Proprietary Data & Modelling, Economic Research.

Introduction. T he past six months have been difficult for the UK economy, as ongoing economic concerns in the euro area, as well as signs of broader global economic slowdown, have served to increase the level of caution among businesses regarding business prospects. We have had official confirmation that the economy has fallen back into recession, albeit a relatively mild one – an outturn that was slightly weaker than the broadly flat to marginally negative profile indicated by our previous survey in January. The first half of the year has therefore been more challenging than anticipated, as evidenced by declines in the net balances for key economic indicators in our survey. Indeed, the indicators for sales, orders and profits for the past six months fell to the lowest levels since the economy emerged from the last recession in mid-2009. There are some glimmers of hope, however, in the latest survey which draws on the responses of nearly 1,800 businesses up and down the country and across all industry sectors. The results suggest that overall business confidence has risen modestly, driven by improvements in sales and orders, though it remains at relatively low levels consistent with a profile of weakly positive growth. There is still a stark contrast between anticipated export sales to Europe and to the rest of the world, with a further weakening in the former expected in the next six months. While exports to the rest of the world remain relatively strong, they are

also anticipated to ease from levels experienced six to twelve months ago. Domestically, weak demand remains a key concern among businesses, though this seems to have eased compared with recent surveys. Nevertheless, significant challenges remain for many businesses operating in consumer-facing sectors, as well as in construction. Businesses in manufacturing, healthcare and business services were somewhat more optimistic about prospects. Overall employment and investment prospects, while better than six months ago, remain subdued. I am very grateful to all of you that have assisted us in responding to the survey and in helping to provide such a comprehensive view of developments in the UK economy. I would like to wish you every success and look forward to supporting you through these challenging economic circumstances.

Stephen Pegge Director of SME Markets Lloyds Banking Group Commercial

1

Recent trends in the SME market. Sales and orders disappoint in the past six months.

Sales, orders and export sales balances over the last six months. Sales

Sales and orders: % balance, up minus down

50

Total orders

40

20

30

15

20

Rest of the World

2

10

10

1 2

0 -10

5 0

1

-5

-20

-10

-30

-15 2001

-40 1994

1

2

2

Europe

Export sales: % balance, up minus down 25

1995

1997

1998

2000

2001

2003

2004

2006

2007

2009

2010

The net balance for overall sales in the past six months fell five points to 9%, the lowest level for two years. The fall suggests that the recovery in sales that began in mid-2009 has decelerated. While the indicator is still above the lows experienced during the last recession in 2008/9, it remains below levels prior to the financial crisis, suggesting that the recovery in sales has been sluggish. The net balance for total order book levels fell one point to 9%, below the long-term average of 16%, indicating that overall demand remains subdued. Only a third (34%) of businesses said that demand had risen in the past six months, while a quarter said that it had fallen.

Recent trends in the SME market

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2012

1

The intense economic crisis in the euro area has prevented any meaningful pick-up in export sales to the continent in the past six months. The net balance edged up to 6%, but it remains well below 18% recorded a year ago.

2

Export sales to the rest of the world are robust in comparison to sales to Europe, though the net balance declined five points to 17%, tallying with broader evidence that global economic activity is showing some signs of moderation.

Some glimmers of hope in the next six months.

Expectations for total sales and orders in the next six months have improved, compared with the last survey six months ago, but they remain below respective levels a year ago and also below their long-term averages. The net balance for total sales in the next six months rose four points to 19%, while total orders increased six points to 20%.

2012 H2

2012 H1

40%

38%

Expected sales: down

21%

23%

Balance

19%

15%

2012 H2

2012 H1

34%

32%

Expected sales: up

Expected orders: up

Export activity in the next six months are anticipated to moderate, reflecting ongoing difficulties in Europe as well as indications of a wider slowdown in global growth. The net balance for expected export sales fell three points to 22%. In terms of imports, the net balance for the coming half year rose six points to 25%, suggesting some improvement in domestic demand, though that is still at a weaker level than a year ago.

Expected orders: down

14%

18%

Balance

20%

14%

2012 H2

2012 H1

Expected exports: up

36%

38%

Expected exports: down

14%

813%

Balance

22%

25%

2012 H2

2012 H1

36%

35%

Expected imports: down

11%

916%

Balance

25%

19%

Expected imports: up

A Survey of Business Opinions and Trends | 40th edition July 2012

Uncertainties in Europe remain a key issue for exporters. The past six months have been more challenging than anticipated, with the economy falling back into recession. This is reflected in the survey’s key indicators, such as sales and orders, which have disappointed, though they remain higher than the lows experienced during the 2008/9 recession. The intense European economic crisis has continued, adversely affecting business sentiment at home and abroad, while evidence of moderating global economic activity has been building. These risks are likely to remain in the next six months, if not longer. Nevertheless, there are some indications among businesses in our survey that they expect a modest improvement in sales and orders in the second half of the year. This may result in the economy emerging from the latest downturn, though underlying growth in the remainder of the year is expected to be only moderately positive.

3

The ability to compete internationally has fallen.

Weaker domestic demand remains a concern.

70

Previous survey

% Businesses

Current survey

35

60

Improve

% Businesses

Deteriorate

30

50 25

40 30 20 10

1

15

2

10 Other

Employment/other regulation

Cost & availability of finance

Weaker overseas demand (exporters only)

Weaker UK demand

0

Weaker domestic demand remains a concern, cited by 49% of businesses, though this was lower than 60% in the previous survey. Just over a quarter (26%) of exporters indicated that weaker overseas demand was the greatest threat. The proportions mentioning the cost and availability of finance, and employment and other regulation edged higher compared with the last survey, but remained relatively low.

4

20

Recent trends in the SME market

5 0 Jun06

Dec06

Jun07

Dec07

Jun08

Dec08

Jun09

Dec09

Jun10

Dec10

Jun11

Dec11

Jun12

1

The ability to compete internationally among exporters deteriorated compared with the last survey. Only 21% of businesses that export reported an improvement in the ability to compete, the lowest level since mid-2008.

2

There was a rise in the proportion of businesses indicating a deterioration in the ability to compete internationally to 15%, up from 11% in the previous survey. This is likely to be a reflection of weaker global demand, especially in Europe, as well as indications from the survey that the strength of the pound against the euro was having a negative impact on exports.

Hiring and investment intentions slightly less weak.

Investment, employment and capacity trends.

30

Future expectations: % balance, up minus down

Investment

Employment

20

full capacity (RHS)

%

60

skilled labour recruitment difficulties (LHS)

%

44 42

50

1

10 0

40

2

40

2

-10

36

30

34 32

1

20

-20 -30

10

-40

0 1994

1995

1997

1998

2000 2001

2003 2004 2006 2007

2009 2010

2012

30 28 26 24 1994

1995

1997

1998

2000 2001

2003 2004 2006 2007 2009 2010

1

Businesses at the margin have signalled slightly more positive hiring intentions compared with six months ago, but the vast majority (two-thirds) plan to keep staff levels unchanged. The net balance for expected employment in the next six months rose six points to 5%.

1

Difficulties in recruiting skilled labour fell marginally, but has remained broadly steady at a low level at 23% compared with the long-term average of 38%. Firms in business services, healthcare and manufacturing reported the greatest difficulties in recruiting skilled labour.

2

The net balance for investment spending in the next six months rose five points to -2%, reversing the fall in the last survey. Capital spending intentions remain weak, however, especially compared with levels prior to the last recession.

2

The proportion of businesses reporting that they are operating at full capacity increased one point to the long-term average of 36%, despite weaker demand in the past six months. This may suggest some permanent loss in spare capacity in the economy, but it may also point to idle capacity that could be brought back to use in future.

A Survey of Business Opinions and Trends | 40th edition July 2012

38

2012

Challenges remain in rebalancing the economy. A slight improvement in some key economic indicators in our surveys suggests that the economy could return to growth in the second half, albeit at a sluggish pace. Employment and investment spending intentions have improved slightly, though the proportion of businesses expecting to maintain or reduce current staff and capital spending levels far outweigh those that anticipate to increase them. Weaker domestic demand remains the greatest threat to businesses, even though it seems to have lessened compared with the last survey, while exporters reported a further deterioration in the ability to compete abroad. Overall, these results suggest that the economy will continue to face challenges in rebalancing away from consumption in favour of investment and exports.

5

Output price inflation ease, while profits remain under pressure.

Prices and profits: past performance and future expectations.

50

Price

Past performance: % balance, up minus down

Profits

40

Profits

30

30

20

20 10

1

0 -10 -20

2

-30 -40

10

1

0

2

-10 -20 -30

-50

-40 2012

2010

2009

2007

2006

2004

2003

2001

2000

1998

1997

1995

1994

-60

6

Price

Future expectations: % balance, up minus down

40

-50 1994

1995

1997

1998

2000

2001

2003

2004

2006

2007

2009

2010

2012

1

The net balance for prices charged in the past six months fell four points to 7%, the weakest since early 2011, consistent with the downward trend in official measures of inflation in recent months.

1

rice inflation in the next six months are anticipated to P moderate further. The net balance fell four points to 12%, lower than the previous four surveys and now marginally below the long-term average for this balance of 13%.

2

The squeeze on margins increased in the past six months, with net balance for profits falling six points to -22%. Profits have remained below the long-term average since the start of the financial crisis.

2

rofit expectations remain weak, despite the net P balance for the next six months edging up two points to -2%. Businesses are indicating that they are likely to pass on any cost savings to customers through lower prices.

Recent trends in the SME market

Overall business confidence improved slightly, but remains relatively subdued.

Business confidence. index

50

recession

Summary – economic prospects slightly better in the next six months.

40 30 20 10

1

Average

0 -10 -20 -30

Economic activity in the past six months has disappointed, as the economy fell back into recession. The results of the latest survey suggest that the economy may improve in the second half, leading to a return to growth, albeit at a sluggish underlying pace. Intentions to hire and invest remain relatively weak, though slightly less so than six months ago, while profits remain under pressure and price trends are expected to ease further. Weaker domestic demand remains the greatest threat to businesses, though also less so than six months ago, while the ability to compete internationally has deteriorated.

-40 1994 1

1995

1997

1998

2000

2001

2003

2004

2006

2007

2009

2010

2012

Our measure of overall business confidence, which tracks total sales, orders and profits expectations in the next six months, increased four points to 12. The index remains below the long-term average of 21 and suggests that the economy may return to weakly positive underlying growth in the second half.

A Survey of Business Opinions and Trends | 40th edition July 2012

7

The industrial picture. Business confidence strongest in business services and manufacturing.

Business confidence.

-3

-6 Other services

Total

Hospitality/Leisure

Retail/Wholesale

Transport services

Construction

Overall sales in the past six months were disappointing, with the net balance falling to 9 from 14. Within this, the manufacturing, business services and healthcare sectors performed well relative to the average. However, underperforming sectors include construction, transport services, retail/wholesale and hospitality/leisure.

8

The industrial picture

8

9 4

8

17

-1

-17

Business services

-3

-10

-4

5

17

Other services

-5

0

27

12

Manufacturing

0

3

7

11

Total

3

18 18

Healthcare

4

19

Transport services

5

10

9

Manufacturing

10

Latest

23

Retail/Wholesale

10

16

15

14

14

15

20

19

30 25 20 15 10 5 0 -5 -10 -15 -20

Previous

index

Construction

25 20

Latest

27

26

Business services

35 30

Healthcare

40

Previous

% balance, up minus down

Hospitality/Leisure

Sales over the last six months.

Our business confidence indicator, which tracks total sales, orders and profits expectations in the next six months, increased in all sectors except hospitality/leisure. The sectors with the strongest outlook were business services, ‘other’ services and manufacturing. However, the least positive sectors were construction, hospitality/leisure and retail/wholesale.

Employment intentions improve across most sectors.

10

15 8

6

5

9 6

0

-1

-3

-1 -4

-6 -9

-20 Other services

Business services

Transport services

Healthcare

Manufacturing

Total

Construction

Retail/Wholesale

-15 Hospitality/Leisure

-11

-15

Employment intentions for the next six months improved, although the majority of businesses in the survey expected to keep staff levels unchanged. Nearly all sectors reported a net improvement in employment intentions. Business services and transport services were among the sectors with the strongest hiring intentions, while job prospects in hospitality/leisure and retail/wholesale were the weakest.

A Survey of Business Opinions and Trends | 40th edition July 2012

-8

-8

0

4

3

0

7

-2

-3

-10

-7

-7

-10

-13

-16

-19

-25 Retail/Wholesale

-6 -5

0

-5

0

0

-10

6

Latest 12

Hospitality/Leisure

5

5

6

Previous

% balance, up minus down

Total

10

-5

15

Other services

17

18

Business services

Latest

Manufacturing

Previous

Transport services

% balance, up minus down

Construction

20

Capital spending in the next six months.

Healthcare

Employment in the next six months.

Investment spending intentions in the next six months improved in all sectors except transport services and retail/wholesale. ‘Other’ services, business services and manufacturing signalled the strongest capital spending intentions, while they were the weakest in construction, retail/ wholesale and transport services.

9

The regional picture. Business confidence rose in most regions.

-7 Wales

Glos, Oxon & S Mid

W Mid

SW

Total

E Mid & East

SE

London

NE&C

Yorks

Scot

-12

While overall sales activity eased in the past six months, there were considerable regional variations. Wales exhibited a strong turnaround, after a weak survey six months ago, with strong performances also in Glos/Oxon/South Midlands and the West Midlands. Weakest sales activity were reported in Scotland and the north of England.

10

The regional picture

8

12

19

20

11

8

3

0 -4 -12

-14

W Mid

7

12

Latest

Glos, Oxon & S Mid

9

9 8

Previous

18

Yorks

8

7

14

SW

6

10

16

15

NE&C

2

6

5

11

19

15 13

Scot

0

4

14

15

14

London

3

17 16

21

Total

7

21

19

16

index

E Mid & East

29

26

25 20 15 10 5 0 -5 -10 -15 -20

SE

Latest

NW

Previous

% balance, up minus down

NW

35 30 25 20 15 10 5 0 -5 -10 -15

Business confidence.

Wales

Sales over the last six months.

Looking ahead to the next six months, business confidence improved slightly for the country as a whole and this was reflected in most, though not all, regions. In fact, the North West, Yorkshire and London were among regions where confidence fell. Nevertheless, Yorkshire, along with the West Midlands and Glos/Oxon/South Midlands, reported the strongest overall levels of confidence, while sentiment was the weakest in the North West, Wales and South East.

Employment intentions improve in almost all regions.

Employment in the next six months.

10

Previous

% balance, up minus

5

3 3

3

4

5

4

7

6 3

-1

-1

5

Latest

8

7

8

1 -1

Wales

-10

-5 -4 -5 -10 -10

-8

-15 -15

Scot

0

-5

-9

-15

Yorks

SE

NE&C

Previous

% balance, up minus

0

-6 -11

10 5

-4

-10

-20

5

0

0 -5

Capital spending in the next six months.

-5 -10

-2

-3 -9

2

Latest

5

2 3

-1

-1 -2

-5

-7

-15

-20 -18 Total

NW

E Mid & East

Glos, Oxon & S Mid

London

W Mid

SW

Employment prospects for the next six months improved at the national level and this was reflected in all the regions, with only Yorkshire reporting no change. The South West recorded one of the biggest improvements and now has the strongest hiring intentions, along with the West Midlands, London and Glos/Oxon/ South Midlands. Businesses in Scotland, Wales and Yorkshire were the least likely to add to overall staff levels.

A Survey of Business Opinions and Trends | 40th edition July 2012

-22

-25 Wales

NW

SW

SE

Scot

E Mid & East

Total

Glos, Oxon & S Mid

NE&C

Yorks

London

W Mid

Investment spending intentions for the coming half year improved at the national level, compared with the previous survey, though they remain relatively weak from a historical perspective. Most regions recorded improvements, with the West Midlands, London and Yorkshire signalling the greatest propensity to increase capital spending. Wales and the North West, however, were the least positive about investment intentions.

11

Analysis by size of firm. Business confidence improves most for smaller SMEs.

Sales over the last six months.

35

Business confidence. Previous

% balance: up minus down

25

Previous

index

25

25

20

18

24

15

15

20

16

14

13

15

10

9

10 5

12 9

8

2

13

9

0

0 £5m

-5 Total

Sales activity in the past six months fell for businesses with annual turnover above £5 million, but rose for firms with turnover below £5m, especially those in the £1-1.9 and £2-4.9 million brackets. Weaker activity among the larger SMEs in the first half may reflect their greater propensity to trade externally and therefore their higher direct exposure to the euro area crisis.

12

14

5 1

Total

Latest

22

30

30

15

Latest

Analysis by size of firm

-4 £5m

Business confidence, which measures expected sales, orders and profits in the next six months, has increased the most for businesses with turnover below £1 million. Businesses with turnover between £1 million and £4.9 million also signalled stronger prospects. Sentiment declined, however, for larger SMEs with turnover above £5 million.

Investment intentions improved in all turnover categories.

Employment in the next six months.

14

Capital spending in the next six months. Previous

% balance: up minus down

12

12 10

8

8 5

4

3

15

3

-5

0

-10 -1

-4 -6 Total

-5 £5m

Most businesses in each turnover category expect to keep staff levels unchanged in the next six months. Nevertheless, at the margin, hiring intentions improved across all turnover categories and were the strongest in businesses with annual turnover above £5 million.

A Survey of Business Opinions and Trends | 40th edition July 2012

1

0

0

2 -2

10

5 4

Latest

% balance: up minus down

10

9

6

Previous

Latest

-4

0

-6

-15

-20 Total

£5m

Businesses in all turnover segments remained cautious about their capital spending plans. Nevertheless, investment intentions improved compared with previous survey, especially for businesses with annual turnover above £5 million.

13

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