British small firms are drawing strength from overseas markets, and are predicting rising sales and improved profitability, despite the ongoing spectre of weak domestic demand, according to the latest Business in Britain report from Lloyds TSB Commercial.

 

John Maltby, managing director, Lloyds TSB Commercial said: “Business confidence is on the turn. After such dramatic lows, this revival is a real sign that businesses are genuinely hopeful for the future, and it is clear that many firms now see better sales and profitability on the horizon.

 

“But it remains a confidence tinged with caution. Concerns about home-grown demand are unsurprisingly weighing on the minds of business owners whose success depends on domestic markets. As long as businesses harbour doubts about the economic climate, they will hold back on investment spend and, while there’s enough momentum behind the recovery to prevent it faltering, it is likely to be a long haul.”

 

 

The quarterly report, which canvasses the views of more than 2,300 UK firms, shows that business confidence is now at its highest level since 2007, continuing the climb back from the historic lows of 2008. The Business in Britain Confidence Index, which measures firms’ outlook for sales, order book and profitability, recorded a net positive balance of 18 per cent in June – rising from 16 per cent in the last survey.  

 

The confidence index is the average of the confidence balances, for sales (25), orders (25) and profits (5), based on businesses’ views of how they will perform over the next six months. These individual balances show the net percentage of businesses with a positive outlook – the number of companies expecting a rise minus those expecting a fall.

 

This renewed momentum in business confidence is being driven in large part by the promise of growing exports. A balance of 25 per cent of businesses expects order book levels to rise, in the second half of this year – with 42 per cent expecting a rise in foreign sales, as a result of the rebound in world demand and a sustained fall in the pound.

 

This ‘export effect’ is clear from the high confidence levels amongst businesses for which overseas markets are important. Manufacturers, with their significant overseas opportunities, are the most optimistic (a balance of 34 per cent), ahead of business and professional services (a balance of 33 per cent).  Similarly, larger turnover businesses that are tapped into overseas markets saw confidence jump from 21 per cent in the last survey to 37 per cent. 

 

Despite this export led boost – and the three year confidence high – the balance of 18 per cent remains below the long term survey average of 22 per cent, weighed down by businesses’ fears about prospects for domestic growth.

 

Uncertainty about falling domestic demand is by far the biggest worry amongst businesses across the UK, with more than half (56 per cent) of businesses across the country say that fragile domestic markets are their greatest concern. 

 

Confidence levels across the sectors reflect this concern over domestic demand – with those sectors that are most reliant on domestic markets proving to be the least optimistic. Confidence levels in firms serving the public sector hit -1 per cent, while the hospitality and leisure sectors were similarly pessimistic (a balance of two per cent).

 

The fact that confidence levels across businesses serving the public sector are significantly lower than the average of all businesses is likely to be a reflection of worries about the potential impact of government spending cuts on business opportunities across the UK.

 

The smallest businesses (with a turnover of under £1 million) saw confidence slip, albeit by just one percentage point, to ten per cent, though that level is significantly above lows plumbed in 2008.

 

Despite the apparent strengthening of confidence amongst manufacturers, overall fears of a slowdown in domestic demand are hitting the UK’s manufacturing heartlands, perhaps a reflection of the importance of the public sector to the economy of these regions. Confidence levels are weakest in the West Midlands (a ten per cent balance), with Wales, Scotland and Northern England all registering similarly low levels, compared to relatively strong confidence levels in London and the South East (balances of 25 per cent).

 

However, expectations for export sales are strongest in those areas struggling with domestic demand – a further indication that firms are resting hopes on overseas markets where demand at home is seen to be weak. The balance of firms expecting to grow exports over the coming six months is 57 per cent in Scotland, 48 per cent in Yorkshire and 46 per cent in Wales.  

 

Businesses lack of confidence in prospects for domestic demand is having a knock on effect on their plans for the coming year. While the balance of firms expecting to be able to boost investment has improved dramatically (from -20 per cent to -5 per cent) since June 2008, it remains firmly below the long term average. Businesses are toeing a cautious line, given ongoing fears about economic stability.

 

Other factors that have caused firms to keep the brakes on investments spending include weak profits and excess capacity – both reflections that demand remains an issue for many firms.

  

Trevor Williams, Chief Economist, Wholesale Markets said: “The UK is on the road to recovery, led by improvements in business confidence. Export sales, in particular, have risen strongly, helped by the rebound in global demand as well as the sustained fall in the pound.

 

“The question now is how this renewed confidence will shape the recovery. History tells us that emerging from recession is not always a smooth ride, and we should not expect the coming months to be easy. However, if confidence holds up, we should avoid the double dip that many have feared.”