Birmingham QES -- First Quarter 2008
The Quarterly Economic Survey (QES) is undertaken by Birmingham Chamber of Commerce and Industry and forms part of the biggest independent business survey undertaken in the UK. Drawn from responses given to ten multiple-choice questions through means of telephone interviews and an online survey open to all Chamber members, the results are a key indicator of economic and business trends in the city.
This quarter’s survey is based upon data from 214 respondents, 66 from the manufacturing sector and 148 from the service sector.
The results of answers to QES questions are mainly reported using positive (+) or negative (-) percentage balances. These are calculated by subtracting the percentage that replied negatively to a question (e.g. ‘domestic sales have decreased’) from the percentage of those that answered positively (e.g. ‘domestic sales have increased’).
For further information about the QES, please contact Katie Teasdale, email k.teasdale@birminghamchamber.org.uk .
QES fieldwork took place between 25th February 2008 and 19th March 2008.
Manufacturing
Manufacturers in Birmingham note a slowdown in sales across all markets in Quarter 1 2008. Growth across the UK market has slowed markedly. A percentage balance of firms noting an increase, as opposed to a decrease, in sales fell to +13 per cent and is now at its lowest since Quarter 3 2006. This slowdown is more pronounced across forward orders as a percentage balance of firms noting an increase as opposed to a decrease has fallen to -4 per cent. Whilst particularly dramatic, which perhaps points to the relative fragility of Birmingham’s manufacturers, this is not untypical when compared with national data that suggests the global economy is experiencing a significant slowdown.
Growth across the export market has also slowed in Quarter 1, albeit not at the accelerated rate experienced within domestic markets. A percentage balance of +16 per cent of manufacturers note an increase as opposed to a decrease in export sales over the last three months. This compares with +22 per cent last quarter. However, those firms reporting an increase as opposed to a decrease in forward orders has fallen to a percentage balance of +14 per cent and is now at its lowest since Quarter 2 2006. The comparative strength of export vis-à-vis domestic markets reflects the importance to exporters of the depreciation of sterling and the expansion of European and Middle Eastern markets, particularly in terms of offsetting weaker demand from the United States.
30 per cent of manufacturers note worsening cash flow. This compares with 12 per cent last quarter. Anecdotal evidence suggests that the credit crunch, or at least some firms’ reaction to it, has tended to worsen cash flow for suppliers as customers delay payment further with the associated knock-on effect across the supply chain. Furthermore as some SMEs have relied upon cheap and easy to access credit to bolster cash flow, their position has worsened markedly in tighter credit conditions.
The relatively poor performance of manufacturers this quarter, particularly in the context of the slowdown in the general economy following the credit crunch, has led many to adopt cautious recruitment plans. Consequently, labour demand has softened in Quarter 1 2008. A percentage balance of –1% note an increase as opposed to a decrease in their workforce over the past three months. Looking ahead, a percentage balance of -2% anticipate an increase as opposed to a decrease in their workforce over the coming quarter. Anecdotal evidence suggests that in general those employers seeking to reduce their workforce are preferring to leave positions unfilled rather than initiate redundancies.
This caution is further reflected in the profile of the employees manufacturers are seeking to recruit this quarter. There is a substantial increase in the proportion of firms seeking alternatives to full-time, permanent positions. This quarter, 14 per cent of employers are looking to fill part-time positions compared to 6 per cent last quarter. Similarly, 15 per cent of respondents are seeking to recruit staff for temporary positions- the highest since Quarter 3 2005. This suggests that in keeping with national trends, Birmingham’s employers are reacting to the credit crunch and recessionary concerns by turning to a more flexible workforce.
However, 64 per cent of manufacturers looking to recruit note difficulties in locating suitable staff. Anecdotal evidence suggests that skills shortages, particularly across skilled manual and technical positions remain a significant problem.
Investment intentions for most manufacturers have remained constant this quarter. 66 per cent have not changed their investment plans for plant, machinery and equipment. 63 per cent have maintained investment intentions for training. This suggests that despite the difficult circumstances in which manufacturers are operating, the majority are not as yet retrenching their investment intentions as we might have expected. Many manufacturers are adopting a cautious, wait and see approach in their business planning. This may also indicate the limited extent of the credit crunch’s impact in so far as that investment opportunities in the main do not appear to have been curtailed by tighter credit conditions. This may indicate that the ‘real economy’ has yet to feel the full force of the credit crunch predicted by some commentators.
A percentage balance of +26 per cent of manufacturers expect the price of goods and services to increase over the next three months. Despite well-publicised and increasing concerns regarding inflationary pressures, this is someway short of the +43 per cent recorded last quarter. This may reflect the increased significance of competition this quarter as 18 per cent of respondents indicate that it is more of a concern than previously, compared with 13 per cent last quarter. As economic circumstances deteriorate, Birmingham’s manufacturers are finding it increasingly difficult to maintain margins as competition hinders the extent to which they can pass increased costs on to customers.
Just +13 per cent of manufacturers note an improvement as opposed to a worsening in profits over the last twelve months compared with + 27 per cent last quarter and +55 per cent in Quarter 2 2007. This is reflected in weakened business confidence. +37 per cent of manufacturers expect an improvement as opposed to a worsening in turnover compared to +65 per cent last quarter whilst +36 per cent anticipate and improvement in profitability. This is highly indicative of the challenging circumstances manufacturers find themselves operating within in Quarter 1 2008.
Services
Service sector growth across the UK market has remained reasonably, perhaps surprisingly, robust in Quarter 1 2008. Despite a number of significant ‘losers’ from the fallout of the credit crunch, not least some of those operating within the city’s financial services sector, 52 per cent of service sector firms note an increase in sales this quarter. A percentage balance of firms noting an increase as opposed to a decrease in custom fell slightly to +40 per cent, from +43 per cent recorded last quarter. Similarly, growth across UK forward orders has slowed slightly with a percentage balance of +35 per cent recording an increase as opposed to a decrease, compared to +38 per cent last quarter.
There has been a marked deceleration in growth across export markets this quarter. A percentage balance of +36 per cent of service sector respondents note an increase as opposed to a decrease in export sales over the last three months. This compares with +65 per cent last quarter. Similarly, growth across forward orders has slowed with a percentage balance of + 32 per cent noting an increase as opposed to a decrease. This compares unfavourably with the percentage balance of +49 per cent recorded last quarter. Whilst last quarter’s figures were surprisingly strong and to some degree at odds with national trends, it does seem that the troubled global economy is now impacting upon export demand for Birmingham’s service sector. Again, the extent of this decline may have been limited by the depreciation of the pound and the relative strength of European markets.
In previous quarter, capacity pressures have led employers to increase their investment intentions. However, this quarter the proportion of firms operating below full capacity has risen to 59 per cent and is now at its highest since Quarter 1 2005. The absence of such pressures, combined with prevailing uncertainty regarding economic developments, has led the majority of firms to keep their investment intentions unchanged. As such, 66 per cent have kept investment plans for equipment constant. Similarly, 70 per cent have held investment plans for training. For some service sector firms, this may reflect an inability to raise funds for investment in tighter credit conditions.
These concerns are reflected further in cautious recruitment intentions. Labour demand has softened in Quarter 1 2008. A percentage balance of +19 per cent of service sector firms have increased, as opposed to decreased, their workforce this quarter. Looking ahead, the majority of firms (64 per cent) anticipate that their workforce will remain constant over the coming quarter.
However, despite the weakening in growth across the labour market, of those recruiting, 55 per cent are experiencing labour shortages. 29 per cent report difficulties in filling professional and managerial roles, emphasising concerns around the limited availability and quality of managerial and leadership training in Birmingham’s labour pool.
A significant emerging trend this quarter are the difficulties a growing number of service sector firms report in hiring unskilled and semi-skilled grades of staff. 15 per cent of service sector firms are struggling to fill these positions, the highest proportion since Quarter 2 2006, despite the well-publicised influx of economic migrants who typically fill these positions. This may reflect the costs associated with recruiting and vetting migrant workers’ applications that some SMEs suggest deters them from employing such staff. In addition to this, it is necessary to examine sub-sector specific issues to explain these trends. For example, employers within Birmingham’s balti sector suggest that the Government’s recent adoption of an Australian-style points based immigration system for assessing non-European Union applicants is exacerbating labour shortages across the city’s Asian restaurants. Under the rules, chefs from India, Bangladesh and Pakistan without English language skills struggle to reach the required level of points for entry despite the industry’s dependence upon such semi-skilled immigrants.
The proportion of firms experiencing improvements in cash flow compared with three months ago is increasing. A percentage balance of +24% of service sector firms note an improvement as opposed to a worsening in cash flow compared with three months ago. This compares favourably with a percentage balance of +20% recorded last quarter but remains someway short of +39 per cent recorded in Quarter 3 2008. This is surprising in current circumstances and contrasts markedly with the less positive trends recorded in the manufacturing sector this quarter.
Service sector firms indicate that inflation is the most significant external factor of more concern to their business than three months previously. This is unsurprising considering the well-publicised upward trend in CPI inflation owing to rising energy prices since the turn of the year to 2.5 per cent in February, above the 2 per cent target set by Government.
However, it is also interesting to note that since the Pre-Budget Report (PBR) 2007, which made significant changes to business taxation regimes, service sector firms have consistently ranked corporate taxation as an issue of increasing concern. This quarter 15 per cent note that corporate taxation is of more of a concern to the success of their business than three months ago. This compares with 12 per cent last quarter and just 4 per cent in Quarter 3 prior to the PBR. There is a genuine sense of grievance emanating from service sector firms following a number of the government’s recent decisions, including most notoriously the changes in Capital Gains Tax, that have seriously impacted on the business community’s confidence in the ability of government to deliver a pro-enterprise agenda.
A percentage balance of +49 per cent record an improvement as opposed to a worsening in profits over the last twelve months: just 13 per cent note a worsening in profits. Similarly, a percentage balance of +56 per cent anticipate improvements in turnover and +55 per cent expect profitability will increase over the next year. These figures whilst reasonably positive fall someway short of the exceptional figures recorded throughout 2007. For example, +86 per cent of firms were confident turnover would increase in Quarter 2 2007, and +90 per cent thought that profitability would increase. This is highly indicative of a key message being relayed by Chamber members in Quarter 1 2008: service sector firms in Birmingham are still doing business, but in circumstances that are considerably less propitious as dour economic circumstances set in.
Summary
There had been some surprise that the credit crunch had made so little impact on Birmingham’s business community in the latter quarters of 2007. However, it is now clear that in Quarter 1 2008 businesses in general, but manufacturers particularly, are operating in less propitious economic circumstances than previously.
The Birmingham Chamber QES Quarter 1 2008 report reveals a number of concerning developments, not least muted investment and recruitment intentions and relatively low business confidence scores. Manufacturers in Birmingham note a slowdown in sales across both domestic and export markets; while service sector firms record a marked deceleration in growth across export markets. This is a trend reflected nationally by slowing GDP from 0.7 per cent in Quarter 3 2007 to 0.6 per cent in Quarter 4 2007 and one predicted by commentators to worsen, with even the most optimistic of them expecting growth in GDP across 2008 to fall to between 1.75 and 2.25 per cent.