North East Business Barometer: Businesses are still suffering impact of recession

LATEST GDP figures suggested the UK economy is finally edging out of recession, giving us hope of recovery despite the continuing eurozone crisis, but are we being too optimistic?

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DESPITE the encouraging comments from the President of the European Central Bank that there were tangible signs of improvement in the UK economy, reviewing the responses to the Spring Business Barometer we are struck by their similarity to those received in October.

The key adjectives used in business media reports continue to be “uncertainty” and “low confidence”.

Activity in the eurozone continues to be depressed as fiscal tightening takes hold in Greece and Italy with even Germany’s growth rate stagnant during the first quarter of this year.

It would seem that the priority has been eurozone stability and this remains the case at least for the time being although there continue to be serious issues to address.

The UK economy has avoided a triple-dip recession according to preliminary results that show 0.3% growth in the first three months of the year.

This, however, is hardly encouraging as we bump along in a tight range between negative and positive output.

Although it is difficult to be sure what point in the economic cycle we have now reached, it looks as if there are likely to be some more small ups and downs before the situation changes.

The hope is that we have more or less reached the bottom of the cycle rather than a shelf from which a further, and possibly substantial, drop will occur.

While quantitative easing has fuelled rising stock markets as investors seek out positive real rates of return, a lack of real confidence means that they are quick to correct in the face of perceived negativity.

This was evident last week when the FTSE 100 index, mimicking equity markets around the globe, suffered a fall of 2.1%, its largest one day decline for a year.

Showing little change from the October survey – and indeed from that of a year ago – the results of our barometer indicate that a large number of businesses continue to suffer from the impact of recession.

However, just over half (compared with 42% in October) of respondents report that they are starting to recover, of whom 18% (same proportion in October) stated that they have completely recovered.

This appears to be supported by the respondents’ views on turnover with 52% expecting a moderate increase in turnover (compared with 42% in October and 56% in March 2012). This variable performance is mirrored in our respondents’ order books where 30% have seen no change, although 48% have seen a small increase (compared with 37% in October last year). This is also picked up through current capacity utilisation with 52% (55% in October) operating slightly below full capacity and 18% (same proportion in October) still operating well below full capacity.

Businesses in the region continue to report concerns over the impact of Government’s spending cuts (26%) and their competitors’ activity (30%) alongside low consumer spending (19%).

The former is of particular importance to the region as some 70% continue to report having been adversely affected by public sector cuts; while we do not have to search far to understand the source of low consumer demand.

Despite exceptionally low interest rates, the British Bankers’ Association recently reported an annual rise of 5.5% (end of April) in personal bank deposits with the UK’s major banks.

The record low bank base rate (which has been set at 0.5% since March 2009) has done little to encourage consumers and does not appear to reflect the reality of business borrowing costs either, with 70% reporting that it has had very little impact.

As continued lack of consumer confidence has meant that savings are increasing, the corollary of continued low consumer demand means that growth opportunity will tend to come from overseas rather than from languid domestic markets.

Unfortunately the majority of our respondents are either focussed on the local/North East region (22%) or nationally (56%), with an expectation that demand will increase in both of these areas during the coming 12 months.

Slightly more cheering is the evidence that business confidence appears to have marginally improved, swinging back from pessimism towards uncertainty (67%) and in the case of some towards optimism (22%).

As readers of this report will know, one of the questions that we like to focus upon is the view about the North East region and the extent to which it is seen as providing a business friendly environment.

Some 37% report that the North East region has an excellent environment (compared with 40% in October) with continued focus on the need for improvement in the national and international transport infrastructure, although 30% did note the need for a more positive attitude.

Hopefully, the recent substantial investment in Gateshead and the re-development of its town centre will help ensure that a positive attitude of optimism spreads throughout our region.

:: Dr Philip Shrives is reader in accounting and Dr Jackie Harvey is professor of financial management at Newcastle Business School at Northumbria University

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