Confidence rebuilds in the retail sector but recovery still fragile, BCM Index finds

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Business confidence among retailers and wholesalers has improved in the last three months, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM). 

However, despite a strong rebound in the Confidence Index overall, the BCM supports the view the UK’s economy will continue to zig-zag over the next 12 months, with economic recovery still very fragile.

Barry Knight, head of retail at Grant Thornton UK, said: “I am pleasantly surprised by this significant boost in the key performance indicators from the Business Confidence Monitor for the retail and wholesale sector. It’s positive turnover and profits are generally increasing but it’s still nowhere near the rate seen pre-recession and individual areas of retail are still suffering, particularly as businesses are realising this environment may be the norm for some time. 

“At Grant Thornton we continue to work with dynamic companies that are delivering growth globally and in the UK, so there are still opportunities out there for businesses to look out for.”

Figure 1: Comparison of retail and wholesale sector confidence vs. UK overall

Figure 1: Comparison of retail and wholesale sector confidence vs. UK overall

UK to come out of recession in Q2 2012
The Business Confidence Index continues to be a strong forward indicator of GDP growth with a -0.2% fall in GDP correctly predicted in Q1 2012. The increase in confidence by +21.3 points implies GDP growth of +0.6% in Q2 2012. However, output remains below pre-recession levels and there are significant risks to economic stability. These include high oil prices, the continued euro zone sovereign debt crisis and continued high unemployment in Spain.

Capital investment plans still low
Businesses expect capital investment to grow by just 1.4% over the next 12 months. This suggests the improvement in confidence isn’t translating into plans for companies to start spending the cash surpluses they have been accumulating over recent years. Addressing this needs to be a priority for policy makers as it could really help support a return to sustained economic growth in the coming months.

Exports and employment
This quarter, businesses report that exports are 4.1% higher than a year ago, up from 3.3% last quarter and the strongest growth since Q3 2011. Reported export growth has returned to levels which are comparable with the pre-financial crisis period, suggesting the on-going weakness of sterling since the recession of 2008/09 may be supporting demand for UK exports. Businesses expect exports to grow by 4.5% over the next 12 months, up from 3.9% expected growth last quarter. Job creation in the private sector remains modest, but hiring is expected to pick up. Firms increased headcount by 0.8% over the 12 months to Q2 2012 and expect it to rise by 1.4% over the coming 12 months. Due to above target inflation, households will continue to feel squeezed with limited salary growth expected for the next 12 months.