Optimism slowly creeping into UK plc

On the up: business confidence is increasing in the UK

UK business confidence is on the up according to research from KPMG, with more than half those firms questioned believing the economy has reached the bottom of the cycle.

KPMG’s National Business Confidence Survey revealed that 55 per cent of respondents felt the UK economy had bottomed out and encouragingly 42 per cent of business leaders replied that they were confident about their prospects. This was compared with 22 per cent that felt confident in the first quarter of the year.

One in four executives believe their own prospects are poor, down from 37 per cent in the spring, with one third appearing ‘indifferent’.

However, despite the positive notes, 54 per cent of respondents believed the UK economic outlook is bad, with nine per cent bullish about economic prospects. This is compared with 81 per cent that felt the outlook was bad in the previous quarter.

Malcolm Edge, head of markets for KPMG in the UK, said: “While it's encouraging that there has been an increase in confidence, this is only an improvement compared with the spring, which revealed the lowest levels of optimism since our survey began in 2004.

“Opinion is divided over whether the economy has dipped to it lowest point or whether worse is yet to come, with 55 per cent believing the bottom of the cycle has been reached and 42 per cent fearing we remain on the downward curve.

“I think we are somewhere close to the bottom and that we may need to get used to this uncomfortable position. The jury is still out as the likely shape of the recession and an L-shaped one – with a long period of relative stability but nothing is constituting a recovery – cannot be ruled out.

“The issues affecting the economy over the last year or so: weak demand, spare capacity, margin pressures and funding issues, won’t magically disappear.”

KPMG also reported that one in three firms are experiencing financial difficulties; with 51 per cent facing higher financing costs (compared with 41 per cent last quarter), and 53 per cent of firms experiencing tighter borrowing.

Edge added: “Given the increase in concerns relating to financing, it is perhaps no surprise that our survey found nearly one in four businesses have seen their banking relationship worsen.

“This should send a shot across the bows for business management teams that may be forecasting funding issues. Talking to their bankers and advisers early undoubtedly offers the best way to maintain a good working relationship with their funder, as well as keeping the maximum options open for getting the business back on track with facilities intact.”

He advised firms to undertake a risk assessment to ensure their business is in top condition.

“We are long past the point of hoping ‘business as usual’ will save the day, " he said. "Instead, any companies that have not yet done so should undertake a robust review of their weak points – whether management, financial or operational. The banks are scrutinising their clients in this way so it’s only sensible for management teams to similarly assess their company and take action to avoid unexpected banking issues.

Edge said the vast majority of businesses now have a strategy to reduce business overheads.

"Four in five companies are exploring measures including improving efficiency, reducing third-party spend, cutting headcount, freezing recruitment and reducing their inventory," he said. "Taking firm action to minimise costs and improve efficiency is essential, given the economy may be operating at a subdued level for some considerable time.”