UK economy set to contract as business confidence collapses

04 November 2011 – 

UK economy set to contract as business confidence collapses

Business confidence has collapsed according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM). The Confidence Index has suffered its largest quarterly decline since the survey began, indicating that the UK economy will contract by as much as 0.2% in the last quarter of 2011.

Key findings for Q4 2011 show:

  • The BCM Confidence Index (CI) has fallen from +8.1 in Q3 2011 to -9.7 and is at its lowest level since the depths of recession in 2009
  • Turnover and profit growth expectations have now declined for two successive quarters, implying sluggish growth will continue
  • A steep drop in capital investment growth expectations – a worrying sign of continued business nervousness - and over three-fifths of UK companies are operating below capacity.

Michael Izza, Chief Executive of ICAEW, said: “In the first nine months of the year, businesses have played their part in supporting economic growth. Many are proud of their success against a backdrop of a very slow and protracted recovery. Yet they are becoming increasingly worried about the immediate outlook and the risk of a double dip recession. They are looking to Government which now needs to take urgent steps to restore business confidence and to show that it understands the need to rapidly change the mood music that the business community clearly feels.”

Grant Thornton CEO, Scott Barnes said: “The extent of negative sentiment in underlying business performance indicators, with confidence dropping across the UK's regions and sectors, is worrying. Individual dynamic mid-market companies operating in niche markets continue to do well but the slump in consumer demand and the on-going crisis in the Eurozone is taking a toll. The question is less one of competitiveness and more about the resilience of domestic and international markets. Where they can, businesses need to make the most of opportunities in growing Asian and BRIC economies to maintain demand and safeguard future growth while keeping a close eye on cost and efficiency.”

GDP expected to fall in Q4 2011

The Business Confidence Index closely predicts GDP growth in the eight years it has existed. The sharp drop in confidence among businesses implies that the economy is likely to contract by 0.2% in the final quarter of 2011. As such, growth for 2011 would come in at 0.9%, compared to the OBR projection of 1.7% in March of this year.

Decline in confidence across all sectors and all regions

Business confidence across all sectors has declined. Only one sector, Energy, Water & Mining, is in positive territory (+2.3). The Property sector is the least confident with a Confidence Index of -18.7, followed by Banking, Finance and Insurance (-14.6). Financial services have seen the sharpest decline in the past 12 months as the Eurozone crisis drags on. All UK regions are now negative with marked weakening in confidence in London (-10.3), the South East (-13.5) and Scotland (-14.1).

Financial performance indicators also weak

Expected turnover and profit growth have both fallen back (3.7% and 3.1% respectively). In addition, the number of new employees is only expected to increase by 0.9%, as companies are nervous about taking on new staff. With the employment market weakening, job creation among the private sector is unlikely going to be strong enough to offset rising public sector job losses. Reported and expected export growth has also been revised downwards as turbulence continues in key export markets.

Firms expect inflation to fall away

One positive note is that the BCM supports the Bank of England’s view that inflation will fall back in 2012. Substantial spare capacity remains and businesses expect input prices to ease and pay growth to remain contained. This will not help salary growth though in 2012 and household income will continue to feel squeezed, especially with no real pay increases in the past two years.

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