Swindon & Wiltshire Business News

Major survey shows a marked improvement in business conditions – but inflation concerns hit record highs

on .

Shevaun Haviland

 

The British Chambers of Commerce’s Quarterly Economic Survey  – the UK’s largest independent survey of business sentiment and a leading indicator of UK GDP growth – has found a marked improvement in business conditions in Q2 as covid restrictions eased.

The survey of over 5,800 firms showed that some key indicators, such as domestic sales and business confidence, displayed significant rises, as more firms reported improved conditions, with some indicators returning to pre-pandemic levels as Covid restrictions have eased.

However, it also showed steep rises in the number of firms, particularly manufacturers, expecting to raise prices, and in businesses citing inflation as a cause of concern.

Business activity

Overall, indicators of immediate business conditions show improvements in Q2, with clear rises in activity from Q1 and multiple indicators reaching pre-pandemic levels.

Forty-four percent of firms overall reported an increase in domestic sales in Q2, rising from 28 percent in Q1 and indicating the first significant rise in this metric since the initial rebound from the first lockdown in Q2 2020.  

Twenty percent reported a decrease, compared to 40 percent in Q1, while 35 percent reported no change.

Within the service sector, firms who have continued their operations more steadily through the pandemic, saw further improvement.

Marketing and media, at 52 percent, had the highest proportion of firms reporting increased domestic sales in Q2, followed by professional services (46 percent), up for both from 35 percent in Q1. The proportion reporting decreases in Q2 was 16 percent, down from 33 percent and 29 percent respectively in the last quarter.

Consumer services (35 percent) had the smallest proportion of firms reporting increased domestic sales in Q2 (up from 19 percent in Q1), followed by hotels and catering at 38 percent (up significantly from seven percent in Q1).

In the services sector generally, the balance of firms reporting increased domestic sales increased to +20 percent in Q2, up from -18 percent in Q1. This is the highest level since Q3 2018.

In the manufacturing sector, the balance of firms reporting increased domestic sales increased to +28 percent in Q2, up from -6 percent in Q1. This is the highest level since Q1 2015.

Cash flow 

The indicator for cash flow showed signs of improvement although by less significant levels than domestic sales.

Thirty-two percent of firms overall reported an improvement in cash flow, a 12-point rise from Q1. Forty-three percent reported no change and 26% reported a decrease, down from 41% in the previous quarter.

Hotels & catering firms saw an improvement in cash flow after three quarters of worsening indicators. Forty seven percent reported a decrease in cashflow in Q2, down from 81 percent the previous quarter, with nearly a third (30 percent) reporting an increase, up from only seven percent in Q1.

In the services sector, the balance of firms reporting improved cashflow increased to +5 percent from -26 percent in Q1. This is the highest level since Q3 2019.

In the manufacturing sector, the balance of firms reporting improved cashflow decreased to +5 percent from -17 percent in Q1. This is the highest level since Q4 2018.

Confidence and investment

Sixty-five percent of firms overall said they expected their turnover to increase over the next 12 months, an increase from 55 percent in Q1. Eleven percent expected it to decrease, compared to 22 percent reporting a decrease in Q1.

All sectors have seen a rise in the level expecting turnover to increase when compared with the previous quarter. Marketing & media firms and professional service firms and are most likely to expect an increase in turnover with 70 percent and 66 percent respectively expecting turnover to increase. Public or voluntary services firms (54 percent) are least likely to expect an increase in turnover, followed by consumer services firms (57 percent).

In the services sector, the balance of firms reporting expecting turnover to increase over the next twelve months rose to 49 percent in Q2, up from 24 percent in Q1, the highest level since Q3 2015.

In the manufacturing sector, the balance of firms expecting turnover to increase over the next twelve months increased to 52 percent in Q2, up from 33 percent in Q1, the highest level since Q1 2015.

The percentage of firms reporting increased investment in plant & machinery returned to pre-pandemic levels. Twenty-seven percent overall reported an increase, up from 19 percent in previous quarter, with 17 percent reporting a decrease, down from 30 percent.

Prices and inflation

In the services sector, the balance of firms reporting expecting to increase their prices rose to 31 percent in Q2, up from 27 percent in Q1, the highest level since Q1 2019

In the manufacturing sector, the balance of firms expecting to increase their prices rose to 58 percent in Q2, up significantly from 27 percent in Q1. This is the highest level in the history of the QES dataset starting in 1989.

Raw materials costs are cited as the key driver of rising prices, with 89 percent of manufacturers citing this, while the upward pressure from pay settlements was little changed, cited by only 17 percent of manufacturers.

Forty-six percent of respondents cited inflation as an external factor of concern to their business, the highest

percentage since Q4 2011, and up significantly from 30 percent in Q1.

Suren Thiru, head of economics at the British Chambers of Commerce, said: “Our latest survey points to a striking rebound in underlying economic conditions in the second quarter.

“The UK economy is in a sweet spot right now with the rapid vaccine rollout, the release of pent-up demand as restrictions eased and ongoing government support driving a strong revival in indicators of activity in the quarter.

“The rebound in services activity was distinctly two-paced, with business services providers recording the biggest gains in the quarter while consumer-focused services firms, where the remaining restrictions most limit activity, saw the smallest improvements. Manufacturers enjoyed a notably strong three months, despite ongoing supply chain disruption.

“The historic uptick in price expectations suggests that inflation will drift markedly higher over the near term. However, with our results also showing little evidence that higher inflation is becoming embedded in higher pay settlements, the MPC should have sufficient scope to tolerate a marked period of above target inflation.

“The upturn in forward-looking indicators points to a summer economic rebound. However, the second quarter may be the high point for the UK economy with momentum likely to fade somewhat later this year when government support ends and the transient boost from the economy reopening dissipates.”

The director general of the British Chambers of Commerce Shevaun Haviland, said:  “This latest set of results show that an economic recovery is beginning to take shape, but our members are also telling us that many businesses are far from being out of the woods yet.

"Whilst firms may be beginning to finally see cash coming in, most have a long way to go before they are trading at pre-pandemic levels.

“We must also not forget that while some sectors are now able to operate relatively freely, many such as travel remain heavily restricted, and some are still forced to stay closed altogether.

"These businesses still have their ability to trade limited by law yet are now seeing government support removed just as they can see light at the end of the tunnel.

“These firms have fought incredibly hard to get to this point and they deserve the chance to contribute to the recovery, and it is not too late for government to give them that.

"The taper of government payments into the furlough scheme should be immediately deferred until we take the final step in the roadmap, and further grant support should be extended to the worst affected businesses.

“Government should not see the signs of recovery demonstrated in our results as job done, they should see it as game on. Now is the time for government to work with the Chamber Network to rebuild our country into a better place to do business than it has ever been before.”

Business leaders in Swindon have the chance to discuss the local findings with experts from accountancy and business advisory firm BDO and the British Chambers of Commerce during an online briefing on Thursday, July 8. Full details here: https://www.businessbiscuit.com/8-news/7311-thames-valley-chamber-quarterly-economic-survey