ICAEW General News

Business confidence at all time low but recession will be avoided, says ICAEW

Business confidence has fallen to its lowest level since 2003, according to the latest Business Confidence Monitor (BCM) from the Institute of Chartered Accountants in England and Wales (ICAEW). The BCM Confidence Index declined from -3.9 to -7.2 in the last quarter and from a cyclical peak of +11.5 in Q2 2007. The effects of the credit crunch, a possible recession in the US and a slowing housing market have all contributed to a decline in confidence among finance professionals. Although 2008 will be a tough year, the ICAEW believes a recession will be avoided.

While the fall in the index this quarter is the third in a row, the slowdown in the UK economy is more paced than the descent we are seeing in business confidence. The ICAEW believes that although it will be a difficult year, the economy will escape a true recession (two consecutive quarters of economic contraction) and instead see very low levels of growth.

Michael Izza, Chief Executive of the ICAEW, said:

“There is no doubt that 2008 will be a tough year for a number of companies. Although business confidence is low there are a number of practical things businesses can do, no matter what size they are, to help ensure they get through this period of uncertainty. These include maximising cash flow by tighter control of working capital, stock and debtors; looking critically at capital expenditure; stringent control of overheads as well as improving gross margins wherever possible. The businesses that can do these things quickly will be better able to steer a path through the difficult times ahead.”

He added: “The Business Confidence Monitor has been warning of this insecurity amongst business for some time. As a result I would urge the Chancellor to deliver a low key budget on 12 March which doesn’t impose further change on companies who are finding it tough enough in the current environment.”

The Banking, Finance and Insurance sector experienced the lowest confidence of all sectors falling to 24.2 from -13.9 last quarter and from +13.7 in Q2 2007 reflecting the ongoing turmoil in the financial markets. The ICAEW believes that with banks likely to remain uneasy about providing credit for some time and concerns over exposure to a possible US recession, confidence will continue to be restrained in this sector. Despite a slight improvement from an index of -26.2 last quarter, confidence in the Property sector also remains low at -22.4 due mainly to the slowing housing market.

On a more positive note, confidence rose in the Manufacturing and Engineering sector from -2.6 in Q4 2007 to +3.8. However IT, traditionally the most confident sector, has seen a major decline in confidence from +21.2 to +3.8 – a fall of 17.5 points.

Large firms (those employing more than 250 employees) are the most pessimistic about their business prospects. These companies registered a Confidence Index of -9.7, continuing a downward trend which started a year ago. This compares to a micro business (under 10 employees) where confidence stands as -3.1. The very largest firms, those employing more than 1,000, are most negative with a score of -12.5. The ICAEW believes this change for large business reflects increasing concerns on the health of the global economy. Larger firms are more at risk of than smaller business sizes as they are more likely to serve an international market.

Although the outlook has worsened with both businesses and consumers likely to face a tough year in 2008, the ICAEW still believes the economy is likely to hold up with low levels of growth.

Michael Izza added: “Despite the gloom, continued emerging market growth and the expectation of interest cuts by the Bank of England mean the economy is decelerating in a more orderly manner than might otherwise be expected.”