Business confidence 'at an 18 month high'

Business confidence is increasing and the bank lending drought is easing, according to a series of new surveys today that fuel hopes the economy could be slowly turning around.

But City experts are still warning that a sharp rise in investment is needed to ensure a “sustained” recovery.

And while the Bank of England is expected to stay its hand on further stimulus at its rate-setting meeting this week, economists expect it will have to pump more money into the economy later this year.

Business confidence is an 18 month high, according to surveys published today by both Icaew/Grant Thornton and Lloyd’s Bank, with the former predicting that the surge in its Business Confidence Monitor index from + 4.2 at the end of last year to 12.8 now suggests the economy will grow by 0.4 per cent in the first quarter, avoiding a triple dip recession.

Lloyds Bank, whose monthly Business Barometer finds that the net balance of firms that are positive about their trading outlook rose 6 points to 46 per cent in January, is also forecasting a “ modest expansion” in the economy of 0.3 to 0.4 per cent.

The rise in corporate confidence comes as the Ernst & Young Item Club reports that lending to businesses and households is at the healthiest levels since 2010. After an estimated 4 per cent fall last year – to its lowest level since 2006 – bank lending to firms is forecast to rise 2 per cent this year. 

“Although  growth in lending may seem modest, it will be the fastest growth in bank lending since 2010 and marks the beginning of the end of the painful period of deleveraging the banks have been forced to go through,” E&Y Item Club’s senior economic adviser Carl Astorri said. “We don’t expect the impact on the economy to be instantaneous but, as lending continues to pick up in 2014 and 2015, the money should start to trickle through to cash-starved small and medium sized enterprises.”

According to Icaew, the private sector has seen a 1 per cent rise in staff in the past year, and firms expect to increase jobs by 1.5 per cent over the next 12 months. Its findings are echoed by the recruiter Reeds, which today reports a “steadily strenghtening jobs market”,  with vacancies up 12 per cent on a year ago and 3 per cent on last month.

However, experts are still worried by the lack of business investment. “Despite a rise in confidence, companies’ modest plans for capital investment are a worry as this is crucial to a strong and sustained recovery,” Scott Barnes, the chief executive of Grant Thornton UK, said.

Trevor Williams, the chief economist at Lloyds Bank Commercial Banking echoed the concerns, saying: “We hope greater confidence will persuade companies to increase investment spending to help sustain the nascent signs of economic recovery”.

A slew of economic reports, including construction and retail figures, due this week is nevertheless set to show the economy was hit by last month’s snow and ice. But although the economy also recorded a surprise 0.3 per cent fall at the end of last year, the Bank’s Monetary Policy Committee is expected to wait to see if the recent fall in sterling and the Funding for Lending Scheme boosts growth before taking more stimulus action, according to IHS Global Insight’s chief economist Howard Archer.

“Recent indications are that the economy may be seeing modest underlying growth early on in the first quarter of 2013. Survey evidence available so far shows a decent rise in consumer confidence in January (although it is still week) while the purchasing managers have reported some increase in manufacturing activity and the CBI has indicated moderate growth in retail sales,” Mr Archer said.

He predicts the MPC “will hold fire until at least the second quarter” as it watches to see if inflation is picking up.