UK midsized business confidence monitor

CIMA mid-sized business and economic outlook survey Q2 2011 This report draws together the findings from our Q2 2011 survey of members working in medium sized businesses around the UK.

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CIMA UK Mid-Sized Business and Economic Outlook Survey, Q2 2011 1. Introduction CIMA’s UK mid-sized business and economic outlook survey is now in its third year. This summary reports on the Q2 2011 findings from 709 CIMA members,

including the views of 158 members at director and board level, who completed the online survey between 15 and 30 June 2011.

2. The economy CIMA’s UK economic prospects index fell to 16.0 in Q2 2011 – 8.9 points below the level recorded last quarter (24.9). This is in-line with the Bank of England’s assumed increase in GDP of only 0.3% in Q2 2011 in its last Inflation Report, prepared at the start of May. This anticipated dip in GDP in the second quarter has largely been attributed to the additional bank holiday in April with stronger growth forecast to return in Q3.

However, the survey shows mixed messages around attitudes to the economy. While the prospects index shows a dip in confidence, fears of a double-dip recession are starting to abate with a sharp decline in those who expect the UK to slip back into recession – down from 38% in Q1 2011 to 29% this quarter.

Building on this optimism, twice as many respondents (69% compared to 34%) reported that they were extremely confident that their business will survive the next 12 months.

Fig 1. Economic prospects index GDP

35 30 25 20 15 10 5 0

2%

1%

* Q3 '09

Q4 '09

Q1 '10

Q2 '10

Q3 '10

Source: ONS First Release – Gross Domestic Product (GDP) Base: 709

Despite the overall decline in the UK economic prospects index, economic optimism amongst CIMA members remained unchanged in Q2 2011 compared to the same time last year, with confidence generally

Q4 '10

Q1 '11

Quarterly GDP growth

Economic prospects index

CIMA's UK economic prospects index

0%

Q2 '11

*GDP forecast

more optimistic than it was in 2010. However, optimism for the global economy (42%) is nine percentage points higher than for the UK overall (33%).

Fig 2. Economic optimism 37%

37%

39%

31% 23% 17%

Global UK

5%

A lot more optimistic Base: 709

3%

2%

A little more optimistic

About the same

A little less optimistic

5%

A lot less optimistic

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The primary reasons for increased optimism surrounding the economy, both in the UK and globally, are a return to business confidence, the recovery of the banking system and improved employment prospects. However, the strength of

emerging markets has also been a significant factor for global optimism, while government spending cuts has played a significant factor in growing optimism for the UK economy.

Fig 3. Reasons for feeling more optimistic about the economy

57% 37%

Global

Business confidence

20% 31%

Strength of emerging markets

23%

Government spending cuts 60%

Employment prospects

39%

UK

Recovery of banking system

35% 31%

Base: Global (298); UK (233)

Government spending cuts have created a real divide in the economic outlook amongst CIMA members.

While government spending cuts is one of the key reasons for feeling more optimistic about both the global and UK economies compared with the same time last year, it is also the primary reason amongst

those who feel less optimistic. The other key fears amongst respondents who are feeling less optimistic about economic prospects are similar for the UK and globally, with inflation, increasing oil prices, and unemployment seen as the biggest areas for concern.

Fig 4. Reasons for feeling less optimistic about the economy 58% 47% 45%

Global

Government spending cuts

28%

Inflation 67% 59%

UK

Increasing oil prices Unemployment

44% 31%

Base: Global (146); UK (196)

Almost eight out of ten (78%) of respondents reported that the Bank of England’s decision to keep interest rates unchanged has had no impact on their businesses performance (16% report a positive impact and 7% a negative impact). Looking forward, three-quarters (76%) of respondents also believe that

the Bank of England should keep interest rates unchanged in the next quarter. This represents an increase of six percentage points since last quarter, with the decline coming solely from those who believe interest rates should increase – down from 28% in Q1 2011 to 22% this quarter.

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Fig 5. What should the Bank of England do with interest rates next quarter?

2%

22% Increase Keep the same Decrease

76%

Base: 709

3. Business performance While overall confidence in business survival has remained stable at 93%, those feeling extremely confident in the survival of their business over the next 12 months has more than doubled since last

quarter – from 34% to 69% - and is well above the level recorded at any point since the survey began three years ago.

Fig 6. Business survival confidence Confidence total

83%

83%

85%

87%

Extremely confident

91%

88% 56%

42% 42%

Q1 '09

45%

46%

48%

38%

39%

39%

Q2 '09

Q3 '09

Q4 '09

48%

Confident

93% 87%

84% 59%

51%

93% 69%

49%

43%

Q1 '10

32%

36%

Q2 '10

Q3 '10

35% Q4 '10

34% Q1 '11

24% Q2 '11

Base: 709

The overriding challenge for mid-sized businesses over the next 12 months is concern surrounding a reduction in customer demand, with almost six in ten respondents (58%) raising this as one of the top three challenges facing their business. Around one-third of respondents also identified materials and supplies and political and economic instability as anticipated challenges. In addition, three in ten respondents raised concerns around regulatory requirements, and one in five respondents raised concerns around commodity costs and the availability of skilled personnel, reinforcing the view that there are employment prospects in the market for those with the appropriate skills. However, the division between those who are optimistic and those who are

pessimistic about employment prospects in the economy is well founded with 28% of respondents reporting a decrease in the number of full time equivalents (FTE’s) since the last quarter and 23% reporting an increase. Furthermore, just over a quarter (26%) of respondents expect government spending cuts to have a direct impact in the reduction in FTE headcount in 2011. This rises to 44% in the public sector and 43% amongst those working in health and education. The industries least likely to experience a reduction in headcount as a direct result of government spending cuts are the transport, distribution and storage (16%) and banking (18%) sectors.

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Fig 7. Top challenges for businesses 58%

Customer demand 37%

Materials and supplies costs

34%

Political and economic instability

29%

Regulatory requirements Commodity costs Availability of skilled personnel

22% 20%

Base: 709

4. Apprentice Initiative Almost three in ten (28%) mid-sized businesses are expecting to take advantage of the government’s £1.4bn funding initiative to train apprentices. Midsized manufacturing and engineering businesses are most likely to take advantage of the scheme, with 44% likely to take on apprentices. Meanwhile, media, marketing, advertising and PR businesses are least

likely with just 5% expecting to take advantages of the apprenticeship scheme, closely followed by financial services and banking industries (10%). Of the 197 businesses expecting to take advantage of the initiative, the median number of apprentices each business is expecting to recruit in 2011 is five.

5. Sustainability Six out of ten respondents were aware that their company has a sustainability strategy in place, 13% were unaware and 27% said that their company had no such strategy. Despite this, just 7% said that sustainability is not a priority for their company, with a further 18% identifying it as a low priority.

it was felt that the CEO was best placed in 45% of businesses to lead on sustainability, with one in five feeling that a sustainability specialist would be best placed and 17% feeling that the operations director would be the best person to lead on sustainability matters.

Furthermore, just over half (51%) of respondents said that the organisation they worked for had the necessary skills within their company to become a low carbon and resource efficient organisation. However,

The most important factors driving business sustainability efforts are to comply with legal and regulatory efforts and efficiency and cost savings.

Mean score 5 = critical driver

Fig 8. Factors driving business sustainability efforts Compliance with legal and regulatory requirements

3.8

Efficiency and cost savings

3.8 3.6

Managing risk to the reputation of your company/brand(s)

3.5

Achieveing competitive advantage and long-term profitability

3.4

Value set of company and/or its leaders

3.0

Customer demand for green/sustainable products Supply chain vendor requirements

2.8

Public scrunity over labour, sourcing or other business practices

2.8

Base: 709

Employee attraction and retention

2.6

Government grants or other initiatives

2.6 1 = not at all a driver

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6. Legislation The Bribery Act, which makes it easier to prosecute companies who make corrupt payments abroad came into force on 1st July 2011. However, despite this new legislation, which creates offences that carry prison

terms of up to 10 years and unlimited fines, just 53% of respondents were aware of their companies’ preparations for the Act, with 11% stating that their company was not prepared for the Bribery Act at all.

7. Survey background The survey was conducted online between 15 and 30 June 2011 and comprises 709 responses from qualified CIMA members. Respondents comprise the following breakdowns: Region East Midlands East of England London North East North West Northern Ireland Scotland South East South West Wales West Midlands Yorkshire & Humberside Business size by number of employees

% of respondents 6% 5% 21% 3% 11% 2% 6% 22% 8% 2% 7% 9%

21-49 50-249 250-499 500-999 Company turnover

17% 46% 20% 17%

Less than £11million £11-40million £41-100million £101-500million £500million-£1billion £1billion+

13% 13% 12% 18% 9% 28%

Sector Manufacturing and engineering Retail and consumer goods ICT, technology and telecoms Financial services Health and education Construction and property Public sector Transport, distribution and storage Not-for-profit/charity Banking Media, marketing, advertising and PR Travel, leisure and tourism Natural resources, energy/fuel and utilities Sales, purchasing and supply chain Oil, gas and alternative energy Other Job role Chairman, non-executive director, MD, CEO or CFO Finance director or other director Financial controller Finance manager Management accountant Finance or business analyst Other

% of respondents 22% 8% 8% 7% 7% 6% 6% 4% 4% 3% 3% 3% 3% 2% 1% 14% 4% 19% 17% 20% 19% 8% 23%

Calculation of the CIMA Economic Prospects Index The CIMA Economic Prospects Index is calculated by respondents entering their confidence in economic prospects facing their business over the next quarter on a scale of 0 to 100.

Much more confident Slightly more confident As confident

+100 +50 +0

Slightly less confident Much less confident

-50 -100

Using this method, +100 would indicate that all midsize companies responding in the survey are much more confident about future prospects, and -100 would indicate that all mid size companies are much less confident about future prospects.