U.K. Business Confidence Steadies Ahead of the New Year

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Brexit remains the elephant in the room for UK companies in 2018 but, with inflation now set to abate, economists see scope for a pickup in growth.

Confidence among U.K. businesses has steadied going into the New Year, according to the latest Business in Britain survey by Lloyds Banking Group, while the number of the companies planning to increase investment has risen to a post-referendum high.

Overall, 23% of companies polled in the survey say the outlook for sales, orders and profits is positive, which is down a touch from the 24% seen back in July but up substantially from the 12% reported immediately after the Brexit referendum of 2016.

“Business confidence was highest in manufacturing, while sectors more dependent on domestic demand, such as hospitality and leisure and retail and wholesale, also recorded gains,” says Hann-Ju Ho, a senior economist at Lloyds Banking Group.

Around 9% of companies plan to raise their headcount by hiring new staff during the six months ahead, according to the survey, up from 8% in July 2017. Some 13% of firms expect to increase capital expenditures, up from 8% at the time of the last survey.

Labour shortages remain a problem for UK companies after 46% of companies said they are having difficulties recruiting skilled staff, with the acutest shortages felt inside of London.

Although that is down from the 52% that reported difficulties back in July, Lloyds’ Ho says the number is still above its recent historical average.

As a result, 18% of firms expect to increase pay for staff in 2018, which is up from the 16% reported back in July but below the average of 27% seen in the two years before the EU referendum.

Inflation continues as a theme among U.K. firms as 2018 gets underway, with close to a quarter (23%) of those responding in the survey saying they intend to raise their prices this year, up from 20% back in July.

“The outlook for the external environment remains mixed, with Brexit negotiations underway and an uncertain economic landscape,” says Gareth Oakley, managing director of business banking at Lloyds Banking Group.

Meanwhile, sentiment among exporters has cooled a touch over recent months with the number of firms expecting export growth slipping from 29% in July to 24% in January.

“Weaker demand, both domestic and overseas, remains the single greatest risk in the next six months according to businesses while concerns also rose on economic and political uncertainty,” Oakley adds.

The 'elephant in the room' for most companies, predictably, is the outcome of the Brexit negotiations. Most pundits say talks will yield details of a transition deal and a broad outline of the future relationship by the end of the current year.

“The share of firms that are confident about business interests being protected or promoted in Brexit negotiations fell to 48% from 60% previously, but it remains higher than the share expressing a lack of confidence, which increased to 29% from 18%,” says Ho.

While there are sure to be plenty of loose ends left to tie up at the end of the year, current hopes are that the key details of a deal can be agreed in time for them to be approved by the European Council at its October summit.

Meanwhile, 39% of firms polled in the survey say that a “No Deal Brexit”, which would see talks break down and the UK default to trading with European Union countries on World Trade Organization terms, would be bad for their business.

This is more than twice the 18% of firms that said a failure to secure a deal would be good for their business.

Lloyds’ survey comes as Prime Minister Theresa May prepares to reshuffle her cabinet and British negotiators ready for the first round of discussions on transition to the new relationship after the UK’s March 29, 2019, exit day.

“While in the political sphere, reshuffles hold the equivalent entertainment value of ‘eviction days’ in a popular reality TV show – any fundamental fallout for the Pound seems unlikely from the PM’s team tinkering this week,” says Viraj Patel, a foreign exchange strategist at ING Group.

The Prime Minister has been reported to be lining up a new ministerial post where a new cabinet member will be responsible for managing contingency planning for a “No Deal” outcome.

“Key ministers like Chancellor Philip Hammond, Brexit Minister David Davis and Foreign Secretary Boris Johnson are expected to retain their posts – while one should also not read too much into the appointment of a new minister responsible for managing Brexit ‘No Deal’ contingency plans,” Patel adds.

The curtain closed on 2017 with the UK economy appearing to have regained some of the momentum it lost during the earlier part of the year, leading some economists to forecast only a minor slowing of overall growth for the year.

“The all-sector PMI points to quarterly GDP growth of around 0.5%, a touch stronger than Q3’s 0.4% expansion. This would leave GDP growth for 2017 as a whole at 1.8%, broadly unchanged from 2016’s 1.9% outturn, and far stronger than the consensus had predicted immediately after the EU referendum,” says Paul Hollingsworth, a senior UK economist at Capital Economics.

Capital Economics forecast a further acceleration of UK economic growth in 2018, with GDP likely to expand by around 2%, assuming the Pound avoids another leg downward and recent high inflation begins to dissipate.

UK inflation rose from an annual rate of 0.6% in August 2016 to 3.1% in November 2017, taking it above median 2.4% growth seen in wage packets during the period and probably helping to shave around 0.6% off of GDP in the process.

“To be fair, relative to the market’s very depressed growth expectations for 2017 following the Brexit vote in 2016, the UK did much better than expected last year,” says Kallum Pickering, senior UK economist at Berenberg. “That is, however, not to say that Brexit did not hurt.....Without Brexit, the UK economy would have expanded by at least 2.5% last year.”

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