Corporate confidence and the UK economy
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Most of the commentary published on the UK economy is focused on consumer spending and the housing market, but the outlook for the UK economy looks to be more dependent on the corporate sector, and indeed the poor level of corporate spending since 2009 largely explains the modest rate of recovery experienced by the UK economy since then.
Corporate spending doesn’t tend to get as much attention as other segments of the economy because it makes up a smaller share of GDP than the consumer segments, but importantly it does also tend to contribute more to the volatility of growth, and in as much as employment tends to be correlated with corporate spending, it can have a significant bearing on household incomes.
This perspective is borne out by the Office for Budget Responsibility’s recent forecast evaluation which revealed that the level of real GDP in Q2 2012 was close to 6pp lower than was forecast at the time of the 2010 June budget, and the lion’s share of that miss was due to weaker corporate spending.
It may also be that the corporate sector hasn’t received as much attention as the other segments of the economy because of the visibly substantial corporate financial surpluses and relatively low borrowing rates.
The mismatch between the health of corporate balance sheets and activity levels looks likely to be the challenge that firms’ expectations of revenue and profits growth, which in turn are a reflection of low expectations of final demand have been unusually subdued.
We can’t be surprised that corporate confidence has been restrained given fiscal tightening and the crisis in Euroland which involved a collapse in domestic demand, but there had been recovery in corporate expectations of profitability from the lows of the recession, albeit only to subdued levels between 2009 and 2012.
However the most recent window on sentiment, last week’s British Chambers of Commerce Survey of the manufacturing and services sector, has provided an extremely clear and important indication that corporate expectations about demand, revenues and profits have now recovered to what can be regarded as more “normal” levels, in effect calling an end to the gloom that affected the corporate sector following the global financial crisis.
The improvement in expectations points to scope for corporate spending to improve next year, and this in turn would provide significant support for the current recovery in the UK economy, and importantly the current upswing looks remarkably broadly based with evidence suggesting that both corporate and consumer spending, as well as exports, are all contributing to growth.
The return in confidence can be largely attributed to the improved outlook for demand and profits which in turn reflects the expectation that the fiscal squeeze in the UK has abated, at least for the time being, and the collapse in demand, financial volatility and uncertainty over the Euroland crisis has also come to an end. That has already been reflected in a strengthening in order books, both domestic and foreign, consistent with a turn in demand in Euroland.
We can anticipate that recovery in corporate confidence and sales should be reflected in corporate behaviour, and there has already been a shift up in investment intentions, especially in the services sector. And recovery in corporate confidence and spending intentions supports improvements in other cyclical indicators, such as the PMI surveys, and the prospect of genuine and sustained acceleration in growth.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
