Figures released by the Office for National Statistics (ONS) show that the UK economy contracted by 0.5 per cent in the last three months of 2010. However, according to the latest Business Factors Index from commercial finance provider Bibby Financial Services, business turnover during this time was significantly higher than the same period last year, indicating that the UK economy is still on track for gradual recovery.
In December, the Index, which tracks the quarterly performance of business turnover among Bibby Financial Services’ 3,000-strong UK client base, dropped to 95.3, the lowest monthly reading since May 2010.
This was a result of severe weather conditions causing disruptions to many firms and the short nature of the month in which businesses closed for trade over the Christmas period. Despite these factors, the overall Index reading for Q4 2010 reached 99.5, an increase of 8.5 per cent on Q4 2009.
This positive sign is reinforced by the fact that business turnover in the final quarter of 2010 is the highest Q4 reading in three years and the third highest quarterly reading ever recorded in the Index. This has helped to make 2010 the strongest year on record, with the Index average of 96.5, up by 13.5 per cent on 2009.
All sectors saw a year-on-year improvement in turnover with a seasonal boost in productivity helping to stimulate growth. Transport and storage triumphed as the best-performing sector with a quarterly Index reading of 116.6 in Q4 2010 an increase of 33.1 per cent since Q4 2009.
This is the highest quarterly reading the sector has seen since the Index began in 2007. This was closely followed by the wholesale industry, which saw the Index reach 112.6 in the fourth quarter, up by 17 per cent on the same period last year. A seasonal peak in November raised the Index to 122.8, the highest reading the sector has seen since October 2007.
The pre-Christmas surge in output is reflected in the outlook of business owners and managers across the UK, which was captured at the end of November.
A series of 300 interviews conducted by Bibby Financial Services – a prominent provider of finance for business – as part of the report show a correlation between performance and confidence, with almost three quarters (72 per cent) of firms responding positively when asked how their business is currently faring.
This is up slightly from the 68 per cent who responded in the same manner in Q3 2010. These results align with the findings of the latest British Chambers of Commerce Quarterly Economic Survey, which reports that profitability confidence increased by seven points in Q4, to +30%, the highest level since Q4 2007.
Edward Rimmer, UK chief executive at Bibby Financial Services, comments: “Our latest Business Factors Index reveals some very promising signs regarding the current state of the UK economy and its prospects for growth in 2011.
“The fact that overall turnover among our client base in Q4 is 8.5 per cent higher than the same period a year ago suggests that not even the disruptive weather in December could prevent UK businesses from driving the economy forward from where it stood at the end of 2009.
“Despite the latest ONS figures showing that UK GDP declined by 0.5 per cent in the final quarter of 2010, it is apparent that business activity is continuing to grow and as an economy, we are still on the gradual road to recovery.”
Attitudes captured among owners and managers of small and medium-sized businesses in November suggest that confidence is in line with performance:
- The number of businesses claiming things are really tough and they’re only just surviving, or have had to make cuts to their business, has declined slightly from almost a third (32 per cent) in Q3 to 28 per cent in Q4 2010.
- The level of optimism has remained the same as the previous quarter, with a third (33 per cent) of firms stating they are hopeful for the future.
- The number of firms that claim their business has never been in better shape, or is actually benefiting from the recession, has not altered since Q3, when 14 per cent responded in this manner. This is due to increased demand for services across several sectors, such as wholesale and transport and storage, which flourished in November.
Does sentiment vary across the regions?
Welsh firms have experienced the greatest turnaround in business performance since the last quarter, with 60 per cent (the highest regional reading), claiming that their business is steady, compared to just 24 per cent in Q3. Furthermore, 17 per cent, again the highest reading, say their business has never been in better shape.
In contrast, businesses in Scotland offer the bleakest picture of their current trading climate, with 62 per cent stating that conditions are tough and that they are only just surviving or that they have been forced to make cuts to the business, compared to only 20 per cent in Q3.
Kate Sharp, CEO Asset Based Finance Association, says: “The results of the latest Business Factors Index are indicative of the potential that small and medium-sized businesses have in bringing about economic recovery in the UK.
“Firms are still working through tough economic conditions and 2011 looks set to be another challenging year. However, the fact that turnover is increasing shows that many firms are developing additional revenue streams and there is hope on the horizon.
“Securing funding both to invest and grow is imperative for businesses if they are to sustain growth and ensuring that they are given adequate financial support to do this should be the key focus of the Government this year.”
Edward Rimmer concludes: “Despite positive signs of growth in Q4 2010, the reality remains that businesses are trying to survive and grow in extremely challenging trading conditions.
“As the CBI* outlines, continued cuts in government expenditure are likely to prevent economic activity from gathering any great momentum in 2011, while the rise in VAT, fuel costs and inflation will place additional pressure on all businesses and effect their confidence, not to mention cash flow.
“As a result of these expectations, firms remain cautious about economic recovery but we expect the curve of growth to continue on a steady path. The majority of our clients (60 per cent) continue to cut costs in order to prepare their businesses for further economical challenges ahead, while 45 per cent are managing debt more stringently.
“Looking ahead, in order for businesses to see any growth in 2011, they must keep their financial options open and seek commercial finance solutions which can benefit them in the short and long term. It is important to ensure businesses are prepared for growth and have access to funding where needed.
“With this in mind, it is vital that the Government not only takes robust action to ensure banks increase lending to firms, but that more is done to educate business owners on funding options. That way, they will be given the opportunity to take control of their cash flow and play their part in driving economic revival in this country.”
This and subsequent quarterly updates to the Business Factor Index will be issued by Bibby Financial Services and are available online at the company website.
* CBI Economic & Business Outlook December 2010
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