Business confidence crumbling amid fears of downturn

2005

Business confidence amongst smaller businesses in the UK has faded dramatically over the last quarter, with fewer than a third of firms optimistic about their prospects and more than half saying that the economy is on a downward curve.

The latest quarterly survey of mid-market businesses (those with a turnover of between £5 million and £500 million) by KPMG has revealed a substantial hike in the number of businesses who are pessimistic about their sector's prospects – and their own – over the coming twelve months.

When asked about the business prospects for their sector, three-quarters of respondents replied that they were either indifferent, bad or very bad.

This represents a major increase from the 48 per cent in the previous quarter as well as the previous high of 57 per cent registered at the start of 2005.

Perhaps even more telling is the similar shift registered when respondents were asked about the prospects for their own business. The percentage who feel their own prospects are good or very good has ranged between 60 and 70 per cent for the past three quarters. This quarter has seen that number tumble to 48 per cent.

"These are the most significant changes we have seen in the business confidence numbers since this survey began at the start of last year," said KPMG's Mel Egglenton.

For only a quarter of businesses to be upbeat about the prospects for their sector is an alarming statement

"Small changes are to be expected from quarter to quarter but swings of over 20 per cent suggest that there is a chill blowing through the UK Middle Market. For only a quarter of businesses to be upbeat about the prospects for their sector is an alarming statement."

"We always expect respondents to be more bullish about the prospects for their own business. These numbers always tend to hold up more strongly than those for the sector overall. Therefore, to see this drop below the 50 per cent mark is something which should be making people sit up and take note.

"It's not easy for any business out there, especially with rising energy costs now becoming an increasingly significant factor in day to day operations for many. These figures prove that."

Part of the reason for this fading confidence may be found elsewhere in the survey. In the past, when asked where they feel the UK currently stands in the economic cycle, responses have tended to be fairly well spread out. This quarter however, there is a definite groundswell of opinion in one direction, with 55 per cent believing that we are on a downward curve.

The number who feel we are at the bottom of the cycle remains low at nine per cent – roughly where it has been since the second quarter of 2004. The number who believe we are on an upward curve or at the top of the cycle has fallen back to 36 per cent, having only ever ranged between 54 and 75 previously.

Interest rates were another cause of concern. Around 20 per cent had been looking for an interest rate reduction in the previous two surveys. When surveyed during July – just ahead of a cut being announced – that number had soared to 62 per cent.

But this sudden loss of confidence does not appear to have filtered through to the perceptions of how the sector performs in a European context. When asked to rate the mid-market's competitiveness in Europe, 77 per cent believed it to be competitive or extremely competitive, meaning that these numbers have hardly changed at all in seven consecutive quarters.

"The responses about Europe are important as they suggest that current Middle Market concerns lie squarely at home," Mel Egglenton added.

"The fact that so many respondents were calling for an interest rate cut suggests that falling levels of consumer confidence in particular may have been really starting to bite in the Middle Market.

"Shortly after they were surveyed, those businesses got what they wanted but I would imagine that many of them will ideally be looking for much more than the quarter point cut that they did get."

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