Firms regaining faith in their business prospects

Lloyds TSB Commercial has reported that UK businesses are showing signs of rekindled confidence in their prospects for the rest of the year, but profits will remain under pressure for some time to come, according to its latest Business in Britain survey.

The report charts the performance of more than 2,500 UK firms and their views on prospects for the coming year. It shows that firms are hopeful of an increase in sales and orders by the end of 2009 but indicates that, without the ability to raise prices, profits will continue to fall for many. In addition, the survey highlights that investment and recruitment plans are still being scaled back.

These signs of greater confidence amongst British firms are rooted on hopes for a boost in sales and orders by the end of the year. The survey’s business confidence index, which tracks firms’ expectations for sales orders and profits over the coming six months, has risen to a balance of -3%, from the record low of -32%, six months ago.

The balance of firms expecting an upturn in sales has risen to +1%, with 31% anticipating a rise and 30% braced for a fall. This compares to a balance of -28% in the survey six months ago, when only 20% expected a rise and 48% believed there would be a fall.

A similar picture emerges for orders. The overall balance of firms expecting an increase in the next six months has risen to +6% (27% expecting orders to climb and 21% expecting a fall). At the time of the last survey, by way of contrast, the order book balance was -25%, with only 17% hopeful of a rise and 42% resigned to a downturn.

Despite the fresh hopes for sales and orders, profits are likely to remain under real pressure for most firms. Although the balance of firms expecting rising profits has improved, from a low of -42% in the last survey, it is still firmly in negative territory at -16%. A fifth (21%) expect profits to climb, while almost two fifths (37%) believe they will tumble. Two fifths (39%) think profits will remain stable.

A third (30%) of companies reported cash-flow problems – marginally higher than the level recorded in the survey six months ago (29%), with late payments by customers and weak demand remaining the main causes. These constraints on profitability and liquidity will take an inevitable toll on firms’ investment plans for the rest of the year. While one in 10 businesses (13%) expects to increase investment over the next six months, a third (33%) believe they will need to make cuts, resulting in a balance of – 20%. This is a slight improvement on the balance of -35% in the last survey, but is also still firmly negative.

There is some improvement in the number of firms expecting to increase staff levels. One in 10 firms (11%) plans to recruit during the last six months of 2009, while a fifth (20%) plan to reduce numbers, which is a balance of -9%. Although this is a clear improvement on the balance of -25% in the last survey, it is still a negative balance, meaning that firms are continuing to reduce numbers, albeit at a slower pace.

With consumer and business demand still in the doldrums, firms have little scope, at the moment, to increase prices. Just 15% of firms expect to raise prices over the next six months, while 16% are contemplating cuts – a balance of -1%. Most firms (65%) say they will keep prices on hold.

The picture is better for exports than it is for the domestic market. A balance of 13% expect overseas orders to increase over the next six months – 33% say exports will rise, 20% believe they will fall and 41% don’t envisage a change.

Business confidence improved in all sectors, with business and other services, wholesale distribution and manufacturing reporting confidence levels above the all-sector average.

John Maltby, managing director, Lloyds TSB Commercial said: &quotA major factor in the dramatic fall into recession has been plummeting business confidence – and restored confidence is the key to any recovery. So this evidence that firms are regaining faith in their business prospects is good news.

&quotBut the survey indicates a levelling off in the downturn, rather than a return to strong growth. For the time being, profits will remain under pressure and investment will be on the backburner. And that means businesses will need support in order to ensure the momentum of any recovery.

&quotThe somewhat more positive outlook, with growth projected in export markets, means that there are opportunities and we hope that British firms can seize the initiative.

&quotBanks will play a crucial part in helping firms face this challenge. Throughout these challenging times, Lloyds TSB remains dedicated to providing solid financial advice and to supporting every reasonable request for financial support. We’re committed to helping UK businesses, not only to survive the recession, but to prosper as the economy recovers.&quot