British businesses are breathing a sigh of relief with a post-election bounce in levels of optimism, according to the Grant Thornton International Business Report (IBR). After a couple of quarters of optimism falling, May's surprise election result has lifted the cloud of political uncertainty which had dampened outlook. This comes as business optimism across Europe remains resilient despite the ongoing Greek crisis. However, with the summer Budget around the corner and ongoing uncertainty over Britain's relationship with Europe, the IBR also flags potential blips on the British horizon in the shape of jobs, skills and exports.
The IBR reveals that business optimism in the UK has recovered to 79% in Q2 2015 from 65% in the previous quarter; having steadily tapered down in recent quarters from an all-time high of 85% in the first quarter of 2014. This places the UK seventh highest in the world and comes as business optimism across the EU has hit 58%, its highest level in five years, despite ongoing uncertainty over the future of Greece. Germany is now the most optimistic economy in the IBR at 92% (Q1= 59%), while Italy (32% to 41%) was one of numerous European nations to post significant quarterly improvements in their outlook.
Sacha Romanovitch, CEO at Grant Thornton UK LLP, commented:
"It's great to see business confidence recovering; businesses know that we operate in a volatile, uncertain, complex and ambiguous world. Just as we resolve the uncertainty over the UK election results, new challenges continue to emerge and develop, notably the ever changing situations in Greece. The ability of UK business to make decisions in this environment to drive sustainable growth will be key to confidence translating into strong business results."
Despite the overall optimism, British businesses still retained some reservations over their prospects for the year ahead. According to the IBR, export expectations among UK firms fell sharply in Q2; just 14% plan to increase exports in the next 12 months, compared to 29% in Q1 and 34% a year ago. Similarly, the proportion of firms who plan to hire more people fell from 50% to just 30%. This comes against a trend of rising concerns about skills. UK businesses worried that a lack of skilled workers will affect their growth prospects has continuously crept up from 20% in Q1 2014 to 33% currently.
Sacha Romanovitch added: "Underlying the headline levels of confidence are two indicators that will give George Osborne food for thought as he prepares the Budget. The first is that British businesses' plans to export haven't been this low since 2009. This is key to the sustained economic recovery and in Q3 we'll see whether this is a blip caused by the uncertainties in Europe, still our biggest trading partner, or something more. The second are the twinned indicators around employment: a reduction in plans to hire and an increase in worries about levels of skilled people available to drive business growth. This isn't an issue confined to the UK and goes to the heart of the productivity puzzle. Businesses need to be able to access the right talent with the right skills to support their sustained growth. Longer term, we must ensure that our schools and universities are equipping young people with skills that are valuable in the new global economy – and that people from all parts of society are enabled to contribute positively to economic growth. Encouraging talent at all levels will be critical to creating a vibrant economy where all can thrive."
The UK and Europe are not alone in their sentiment that the next 12 months will be good for business. The three largest economies in the world all saw sharp upswings in optimism: the United States (up 11pp to 54%), China (up 8pp to 46%) and Japan (up 25pp to 8%) all report an uplift in levels of optimism. However, the picture is not universally positive. Brazil, one of the leading emerging economies of the last decade, is seeing a rapid deterioration in confidence and expectations. Over the past year optimism has fallen 56pp to -24%, the biggest negative swing reported by a major economy in the survey over this period. Revenue growth expectations there have plummeted by 29pp to 28% over the same period.