Business confidence in Wales is at its lowest since the second quarter of 2009 when the economy was still in recession, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM).
Confidence has been on a downward trend since the first quarter of 2010 when an index score of 28.7 was recorded. It has now fallen to -6.7 in Q1 of 2011. Seventy senior business professionals were questioned as part of the survey.
But Welsh firms’ financial performance has improved considerably with turnover, sales and gross profits all rising over the last 12 months.
David Lermon, Wales director of ICAEW, said: “Business confidence in Wales is still clearly fragile with growth in gross profits and sales remaining below levels we were used to seeing before the recession.
“There is cautious optimism for the rest of 2011 from business but there is concern among those firms serving consumers due to the reduction in household spending power, brought about by rising inflation and cuts in family incomes.”
Geraint Davies, partner at Grant Thornton in Cardiff, said: “The future impact of the public sector cuts in Wales on the private sector, particularly construction is clearly making people much less positive about the Welsh economy going forward. With a relatively large public sector economy, Wales is less well positioned to ride out any storm.”
Key conclusions:
Welsh firms’ financial performance improved
Businesses in Wales report considerable improvement in key financial performance indicators compared with this time last year. Over the 12 months to Q1 2011 turnover grew by 3.6% compared to a 1.4% decline in the 12 months to Q1 2010. Gross profits and sales volumes also expanded over the last 12 months, by 2.7% and 2.3% respectively, having contracted over the year to Q1 2010. However, these rates of growth all remain below typical pre-recession levels.
The outlook for the next 12 months is one of cautious optimism. Turnover and sales volumes are expected to increase by 4.3% over the next year, although these forecasts are weaker than seen a year ago and also below typical pre-recession levels. Profits are expected to expand by 4.1% over the coming 12 months.
The picture for export growth is somewhat more positive; Welsh firms report a 5.3% rise in exports over the last 12 months and expect robust growth to continue over the year ahead with a 4.8% expansion forecast.
Businesses in Wales remain cautious over investing
This quarter businesses in Wales report that capital investments increased by 0.7% over the past 12 months. This level of investment growth is low compared to historic levels, although an improvement on a year ago when a 2.4% decline in capital investment growth was reported.
The manufacturing sector in Wales is helping to drive investment growth, with Airbus and GE Aviation announcing plans to expand output at their Welsh-based plants. The manufacturing sector has been boosted by improved competitiveness due to the weakness of sterling.
Over the past 12 months businesses in Wales have also strengthened their investment in people. Firms report a marginal 0.6% increase in headcount over the year: in seven of the eight previous quarters a contraction in headcount was reported. Similarly, staff development budgets also expanded marginally – by 0.8% over the past 12 months. However, growth in both measures remains sluggish compared to pre-recession levels.
Weak customer demand underlines fragility in Welsh recovery
Reflecting the notes of caution in the Welsh economic recovery, this quarter nearly half of Welsh businesses (48%) report customer demand to be a greater challenge than 12 months ago. This is up from 36% last quarter and 28% in Q2 2010. Although businesses report that domestic sales expanded by 2.3% over the past year, this remains significantly below pre-recession levels.
For firms serving the consumer, demand will be under pressure due to the elevated level of inflation and weak earnings growth, which are combining to erode real household spending power.
The latest BCM also suggests growing concern among firms about the level of government support and investment in the recovery of the Welsh economy. Almost one in five firms in Wales (18%) report that government support for business is a greater challenge to business performance than 12 months ago, up from just 9% reporting this trend a year ago.
For further information please go to icaew.com/bcm
