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 fourth quarter as the second lockdown squeezed activity.
The bellwether survey of 6,203 firms, who employ nearly a million people across the UK, revealed that there was no fundamental improvement in the key indicators in Q4 and they remain well below pre-crisis levels. 95% of respondents were SMEs.
Key findings:
- Following the sharpest decline in the history of the QES in Q2 2020, all the key indicators in Q4 remained substantially worse than pre-pandemic levels
- 79% of hotels and catering firms reported a decrease in domestic sales in Q4, worsening from 66% in Q3
- Cash flow, a key indicator of business health, continued to deteriorate for 43% of firms overall. For hotels and catering firms, 77% report a decrease.
Overall, indicators remained weak in Q4, with only moderate improvement compared to Q3 and still well below the pre-Covid 19 trend.
- Nearly half of firms (43%) reported decreases in domestic sales, broadly unchanged from 46% in Q3
- 26% of firms reported an increase in domestic sales. 30% reported no change
- 45% of firms reported a decrease in domestic orders, while 33% report no change, and 22% report an increase
- 38% of firms reported decreases in export sales, down slightly from 45% in Q3 but still substantially worse than pre-pandemic levels, where only around 20% of firms reported a decrease
- Nearly a quarter (22%) of firms reported increases in export sales, up from 16% in Q3
In the manufacturing sector, the balance of firms reporting increased domestic sales increased to -9% in Q4 2020, up from -15% in Q3 2020. The balance of firms reporting increased export sales increased to -8% from -26% in Q3
As a percentage balance, the manufacturing sector is seeing a faster rate of improvement in domestic and export sales, though both sectors’ indicators remain in ‘negative territory’, meaning that more firms have reported a decrease in sales than an increase.
Cash flow, a key indicator of business health, continued to deteriorate for more than four-in-ten firms. In Q4, 21% of firms reported an improvement in cash flow, 36% reported no change and 43% reported a deterioration. Levels are broadly unchanged from Q3 which saw some improvement on historic lows in Q2.
In line with indicators from Q2 and Q3, micro firms were more likely to report worsening cash flow, with 51% of these firms reporting a deterioration, compared to 27% reporting a decrease in Q1 2020.
In the manufacturing sector, the balance of firms reporting improved cashflow increased to -15% from -18% in Q3.
Over a third of firms (35%) continue to report decreased investment in plant, machinery and equipment, highlighting longer-term concerns for the economy as many businesses pause investment plans or revise them down. This is unchanged from Q3 and follows Q2, which had the largest proportion of firms revising down investment in the history of the QES dataset.
Nearly half (48%) expected no change in plant, machinery and equipment investment, up slightly from 46% in Q3. Just 17% of firms plan to invest, unchanged from Q3 and remaining historically low.
40% of firms said they expected their turnover to increase over the next 12 months, while a third (34%) still expected it to decrease. Nearly a quarter (25%) expected that it would stay the same.
In the manufacturing sector, the balance of firms looking to increase investment in training increased to -10% in Q4 from -19% in Q3. The balance of firms confident that turnover will improve over the next year increased to +12% in Q4 up from +7% in Q3.
Despite seeing some improvements in some indicators in the previous quarter, business conditions remain close to the historic lows of Q2.
The survey fieldwork took place during the second lockdowns in England and Northern Ireland, and amid tougher restrictions in Scotland and Wales. Continued uncertainty around further lockdowns and restrictions, as well as the many unanswered questions on Brexit, have caused businesses considerable distress, with some saying they are worried about the long-term viability of their business.
Smaller firms and independent retailers report the most pessimistic sentiment, many stating that changes in restrictions, and the introduction of the second lockdown exacerbated cash-flow problems and left them with redundant stock.A wholesaler in Kent reported: ‘We were recovering well from the lockdown until this last month, which has been catastrophic as we had bought for Christmas sales, which were then halted, but the invoices still needed paying.’
Some businesses not forced to close by the lockdown and restrictions are also feeling the effects of the cash-flow crisis further up the supply chain, with marketing budgets slashed or diverted to Covid-related activity. One creative agency commented: ‘2020 has been a dire year for any marketing, creative agency. Clients have taken back budgets to cover Covid and PPE signage, other new clients had to close doors and reduce marketing spend. Only a few see the need to promote or market their business to consumers and attract new sales.’
Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said: “These results indicate that economic activity was strikingly downbeat in the final quarter of 2020 as the re-introduction of tighter coronavirus restrictions weighed heavily on the key drivers of growth.
“The services sector endured a particularly difficult quarter, with consumer-facing businesses most severely exposed to the renewed restrictions. Although manufacturing firms had a moderately better end to 2020, this is more likely to reflect a temporary boost from Brexit stockpiling rather than evidence of a recovery in the sector. The persistent weakness in investment intentions is a particular concern, as it limits the UK’s productivity and growth potential.
“Though the vaccine rollout provides real optimism, a new national lockdown means that a significant double-dip recession in the first quarter of this year is looking increasingly likely.”
Responding to the findings, Director General of the British Chambers of Commerce, Dr Adam Marshall, said: “Our findings demonstrate that businesses across the UK face a difficult and uncertain year ahead in 2021. The announcement of another major lockdown across all four nations of the UK will compound the gloom for many.
“As we start 2021, governments across the UK should be pulling out all the stops to ensure support for businesses is commensurate with the restrictions in place.Both the pandemic and government restrictions continue to hit firms hard, and many are grappling with a difficult period of adjustment to new trading conditions following the end of the Brexit transition period.
“The current drip-feed approach to business support measures is too short term and leaves businesses unable to plan. Ministers must set out, now, what additional steps they will take to underpin business cash flow and help viable firms preserve livelihoods until a full reopening of the economy is possible.They should be boosting confidence by extending tax holidays and key support schemes that are due to expire over the coming weeks.
“As we look to the future, our findings demonstrate that big investment incentives are also needed. Prosperity and success depend on businesses, both domestic and international, having the confidence to invest here in the UK for the long term.
“For business, the pandemic doesn’t end simply because vaccines are starting to be delivered. Brexit isn’t ‘done’, either. The sooner the Prime Minister and his colleagues set out a coherent economic plan and longer-term support to help businesses to restart, rebuild, and renew, the better.
“2021 cannot be a year where Britain dithers while others do.”
