The British Chambers of Commerce’s Quarterly Economic Survey (QES)
The UK’s largest independent survey of business sentiment and a leading indicator of UK GDP growth – found that business conditions remained weak in the third quarter of 2020, despite much of the economy reopening.
The bellwether survey of 6,410 firms, employing over 580,000 people across the UK, revealed that, while key indicators have improved from historic lows in Q2, they remain significantly lower than before the pandemic struck. Business to consumer firms, including hospitality, fared worst.
· Almost half (46%) of firms reported a decrease in domestic sales, while just 27% reported an increase on the previous quarter
· Two-thirds (66%) of respondents in hospitality and catering saw decreases in sales and bookings
· Indicators, including cash flow, remain at levels comparable to the 2008-09 recession for firms in the services sector
Overall, while this quarter has seen an improvement compared to the unprecedented percentage of firms reporting decreases in domestic and export sales in Q2, the majority of firms continue to report decreases or no change in sales in Q3.
· Nearly half of firms (46%) reported decreases in domestic sales, down from 73% in Q2.
· 27% of firms reported an increase in domestic sales. 27% reported no change
· 47% of firms reported decreases in export sales, down from 72% in Q2 but still substantially worse than Q1, where only 21% of firms reported a decrease
· Nearly a quarter (24%) of firms reported increases in export sales, up from 9% in Q2
Business to consumer (B2C) firms, particularly those from the hospitality and catering sectors, saw the weakest performance, with two-thirds (66%) of respondents in hospitality and catering reporting decreases in sales and bookings in the last three months, compared with 46% overall.
In the services sector, the balance of firms reporting increased domestic sales increased to -25% in Q3 2020, up from -64% in Q2. The balance of firms reporting increased export sales increased to -31% in Q3 from -55% in Q2.
In the manufacturing sector, the balance of firms reporting increased domestic sales increased to -15% in Q3 2020, up from -59% in Q2 2020. The balance of firms reporting increased export sales increased to -26% from -52% in Q2.
Cash flow, a key indicator of business health, continued to deteriorate for almost half of firms. In Q3, 21% of firms reported an improvement in cash flow, 34% reported no change and 45% reported a deterioration. In Q2, 11% of firms reported an improvement, 25% no change, and 64% a deterioration.
Micro firms were more likely to report worsening cash flow, with 51% of these firms reporting a deterioration.
In the services sector the balance of firms reporting improved cashflow increased to -30% from -56%. After the lowest level on record in Q2, this balance is the lowest level since Q4 2008.
In the manufacturing sector, the balance of firms reporting improved cashflow increased to -18% from -47% in Q2.
Investment and confidence
Over a third of firms (37%) continue to report decreased investment in plant, machinery and equipment, highlighting longer-term concerns for the economy as many businesses look to downsize. This follows Q2, which had the largest proportion of firms revising down investment in the history of the QES dataset.
Nearly half (46%) expected no change in plant, machinery and equipment investment, up slightly from 39% in Q2. Just 17% of firms plan to invest, up slightly from 9% in Q2 but remaining historically low.
41% of firms said they expected their turnover to increase over the next 12 months, while a third (35%) still expected it to decrease. Nearly a quarter (24%) expected that it would stay the same.
In the services sector, the balance of firms looking to increase investment in training increased from -32% in Q2 to -17% in Q3. The balance of firms confident that turnover will improve over the next year increased from -36% in Q2 to +1% in Q3.
In the manufacturing sector, the balance of firms looking to increase investment in training increased to -19% in Q2 from -38% in Q3. The balance of firms confident that turnover will improve over the next year increased to +7% in Q2 up from -31% in Q3.
Despite improvements in some indicators compared to Q2, business conditions remain close to historic lows.
Most of the survey fieldwork took place before the Prime Minister’s announcement that a ‘second spike’ of Coronavirus had hit the UK on 18 September.
The rise in Coronavirus cases from 7 September, the subsequent introduction of new national restrictions and tightening local restrictions paint a concerning picture for business conditions in Q4.
Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said:
“Our latest survey indicates that underlying economic conditions remained exceptionally weak in the third quarter. While the declines in indicators of activity slowed as the UK economy gradually reopened, they remain well short of pre-pandemic levels with little sign of a swift ‘V’-shaped recovery.
“The manufacturing sector recorded the strongest improvements in the quarter, while consumer-focused services firms, where social distancing restricts activity, saw more limited gains. The persistent weakness in cash flow is concerning as it leaves firms more vulnerable to external shocks, including further restrictions.
“While the government’s Winter Economy Plan may provide a short-term boost, with restrictions tightening and the economic scarring already caused by the pandemic starting to crystallise, the resulting gains in economic output are likely to fade over the coming months.”
Responding to the findings, Director General of the British Chambers of Commerce, Dr Adam Marshall, said:
“Our findings clearly demonstrate that business conditions remain fragile in the face of uncertainty, with the prospect of a difficult winter to come.
“It is time to be direct.
“The economy will need more support, over and above the Chancellor’s welcome recent efforts. Ministers must stand ready to provide that support, and to strengthen measures to underpin business cash flow and jobs.
“The disappointing Test and Trace system must be improved to ensure as many businesses as possible can function through the winter and beyond.
“A Brexit deal must be reached to avoid yet more disruption.
“And above all, businesses need confidence and calm, clear communication to successfully navigate a tricky period ahead.”