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Focus on: United Kingdom

International Business Report 2009 Country focus series


A year of turmoil
Figure 1: Key indicators for PHBs

The United Kingdom economy fell into recession, along with the rest of the industrialised world. The service sector, which has supported growth in recent years, endured a period of marked contraction, led by distribution and business services, whilst manufacturing was down sharply and construction output was depressed by a very sharp fall in housing starts and cancellation or postponement of many projects. The key indicators highlight the issues facing the economy: following output contraction of 1.6 per cent in the final quarter of last year, GDP shrank by a hefty 2.4 per cent in Q1 2009, followed by a more modest decline of 0.8 per cent in Q2 the Bank of England has cut rates to 0.5 per cent in an attempt to limit the recessions depth, leaving little scope for further cuts the unemployment rate was 7.8 per cent in the three months to June 2009, the number of people out of work increased by 220,000 to 2,435,000, the highest level since 1995 public sector borrowing has soared and now exceeds 50 per cent of GDP the CPI annual inflation rate fell to 1.8 per cent in June 2009, down from over five per cent in September 2008.
Impact on privately held businesses

The United Kingdom compared to the EU average Outlook for the economy over the next 12 months Balance of optimists over pessimists Issue of greatest concern in the next 12 months Fall in consumer demand Shortage of business credit Change in employment levels Balance of PHBs expecting an increase over those expecting a reduction Constraints on expansion Shortage of orders/reduced demand Regulation/red tape
Source: Grant Thornton IBR 2009

2007 UK +43%

2008 UK +10%

2009 UK -47%

2009 EU -38%

31% 24%

45% 19%

+33%

+37%

-12%

-12%

17% 32%

18% 27%

44% 25%

52% 30%

The Grant Thornton International Business Report (IBR) 2009 surveyed the views of 7,200 privately held businesses (PHBs) in 36 economies around the world. This report focuses on the United Kingdom, the experiences and attitudes of its privately held businesses and how they have been affected by the worst economic downturn in decades as illustrated in figure 1.

The Grant Thornton IBR 2009 survey tells us that PHBs in the United Kingdom do not expect to suffer as much as other businesses within the EU in terms of falling consumer demand, although a shortage of business credit is more of a concern and employment growth is expected to decline sharply. These concerns impact negatively on expectations for turnover growth and on profitability, and PHBs are overwhelmingly pessimistic about the economy over the next 12 months. Clearly the effects of the global decline in activity are taking its toll on PHBs.
Looking ahead

Contractionary factors continue to weigh heavily on the economy; GDP is forecast to shrink further in the coming quarters, though less steeply than in the past six months, resulting in a sharp year on year contraction in GDP of close to four per cent, making a cumulative fall from peak to trough of over five per cent, the largest since the 1940s. The labour market is set to continue to deteriorate with the unemployment rate forecast to peak at 9.9 per cent and remain high until at least 2012. A lack of

job security will impact on consumer spending which is expected to contract by 3.3 per cent across 2009. Meanwhile, investment is forecast to tank 9.1 per cent across 2009, and neither this nor consumer demand is expected to pick up before 2011. The stabilisation of the economy in late 2009 or early 2010 is likely to stem from an end to heavy destocking; a reduction in the rate of decline in house prices; a more marked revival of lending to businesses and a modest pick-up in export demand with UK manufacturers benefiting from sterlings weakness; although a lack of activity in the eurozone may cool this. The recovery in the United Kingdom economy will need privately held businesses to be back at the forefront to drive new business, employment and trade. To achieve this: businesses need to adjust to the new level of demand while working on innovative ways to develop product and market share access to credit needs to be improved to enable businesses to manage their working capital and long term funding needs the restoration of public finances to health once the recovery gets under way, through tax increases and spending cuts, will need to be well managed to avoid impacting on medium-term growth. It is clear that during the months and years ahead, all businesses will face a number of key threats and opportunities which will require senior management to make some very big decisions. Businesses surviving the downturn will look back on these decisions as pivotal moments in their companys history. Focusing on the right things will give businesses under pressure more room for manoeuvre, while for others it will provide opportunities to realise their ambitions more quickly than they had planned. At Grant Thornton we help businesses to make these decisions on a daily basis, to guide them through the good and bad times. Talk to us to find out how we can help you make the right choices for your business.

David Campbell T +44 (0)114 255 3371 E david.campbell@gtuk.com W www.grant-thornton.co.uk

International Business Report results

The Grant Thornton IBR 2009 reveals that privately held businesses in almost all countries are less optimistic about economic prospects for the year ahead. PHBs in the United Kingdom are considerably less optimistic about prospects for 2009 with a drop of 57 percentage points from an optimism/pessimism balance1 of +10 per cent in 2008 to -47 per cent in 2009. For the sixth consecutive year, India tops the league table with a net balance of +83 per cent (+95 per cent in 2008), whilst Japan remains at the bottom with a balance of -85 per cent. Overall optimism amongst PHBs in the EU2 has fallen from 2008; this year -38 per cent of all EU businesses are positive about their countrys economy compared to a balance of +34 per cent in 2008. This is significantly lower than the global average of -16 per cent, although levels of optimism in the EU range from -65 per cent in Spain to -3 per cent in Germany.
Optimism/pessimism

Figure 2: Outlook for the economy over the next 12 months: 2007-2009 Average percentage balance of businesses indicating optimism against those indicating pessimism 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 European Union United Kingdom Source: Grant Thornton IBR 2009 2007 46 43 2008 34 10 2009 -38 -47

PHBs in the UK are considerably less optimistic about their countrys economic outlook (-47 per cent) compared with 2008 (+10 per cent) levels of optimism regarding economic outlook have fallen by 57 percentage points from 2008 in the UK, compared with the 72 percentage point drop observed in the EU as a whole.

the balance is the proportion of companies reporting they are optimistic less those reporting they are pessimistic. for the purposes of IBR, the term EU refers to those EU countries covered by our survey Belgium, Denmark, France, Finland, Germany, Greece, Ireland, Italy, the Netherlands, Poland, Spain, Sweden and the United Kingdom.

Greatest concern

a fall in consumer demand is viewed as the greatest concern restricting expansion for PHBs in the UK (31 per cent), although this is below the EU average (45 per cent) a shortage of business credit is of greater concern for PHBs in the UK (24 per cent), than for those in the EU as a whole (19 per cent) the increased cost of energy and a shortage of consumer credit are also of slightly greater concern in the UK, than for the EU as a whole.

Figure 3: Greatest concern in the next 12 months Average percentage of businesses Fall in consumer demand Shortage of business credit Increased cost of energy Shortage of consumer credit Increased cost of labour Fall in property prices Shortage of skilled labour Increased cost of non-fuel commodities Increased foreign competition Shortage of foreign investment 31 45 24 19 12 8 12 8 6 6 5 2 4 4 3 2 1 3 1 1 United Kingdom Source: Grant Thornton IBR 2009 European Union

Employment

PHBs in the UK expect employment to contract sharply in 2009, with the balance of businesses expecting an increase falling 49 percentage points this year a similar story is evident across the EU with the regional average falling 39 percentage points actual employment growth across the UK in 2008 (+15 per cent) was notably lower than expected (+37 per cent).

Figure 4: Employment history: 1993-2009 Balance percentage of businesses 60 50 40 30 20 10 0 -10 -20 Expected EU Expected UK Actual EU Actual UK 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* -6 -5 18 14 10 20 26 32 34 20 5 9 10 12 27 27 -12 -12 20 35 25 30 43 21 30 28 34 36 36 33 23 33 37 -12 24 17 21 36 29 41 41 18 7 6 10 25 30 17 39 33 33 41 25 28 45 26 18 24 21 27 37 15

*2009 data will be documented in IBR 2010 Source: Grant Thornton IBR 2009

Revenue expectations

optimism levels regarding revenue prospects have plummeted in the UK this year, falling by 56 percentage points from +66 per cent in 2008 to +10 per cent the EU average decline is the largest in IBR history, falling 60 percentage points, down from +65 per cent in 2008 to just +5 per cent this year.

Figure 5: Revenue expectations: 1993-2009 Average percentage balance of businesses indicating optimism against those indicating pessimism 80 70 60 50 40 30 20 10 0 -10 -20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 United Kingdom European Union 16 57 71 60 61 78 45 54 58 47 61 60 62 52 64 66 10 23 40 65 58 47 64 58 63 64 46 33 44 49 51 59 65 5

Source: Grant Thornton IBR 2009

Profitability expectations

profitability expectations amongst PHBs in the UK continued the decline observed in 2008, falling to -9 per cent this year the drop in the EU average regarding profitability is also the greatest in IBR history, falling by 49 percentage points to -13 per cent this year.

Figure 6: Profitability expectations: 1993-2009 Average percentage balance of businesses indicating optimism against those indicating pessimism 60 50 40 30 20 10 0 -10 -20 -30 -40 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 United Kingdom European Union -2 -3 39 55 45 50 60 19 29 34 26 46 55 57 43 57 54 -9 10 40 26 21 37 29 34 36 17 17 32 33 29 40 36 -13

Source: Grant Thornton IBR 2009

Constraints

a shortage of orders/reduced demand is viewed as the major constraint restricting expansion for PHBs in the UK this year; at 44 per cent, this represents a 26 percentage point increase from 2008, although this is below the EU average of 52 per cent all of the constraints are of slightly greater concern in the EU as a whole than they are in the UK.

Figure 7: Constraints on expansion Average percentage of businesses rating constraint 4 or 5 on a scale of 1 to 5 where 1 is not a constraint and 5 is a major constraint Shortage of orders/reduced demand Regulations/red tape Shortage of working capital Cost of finance Shortage of long term finance Availability of skilled workforce 44 52 25 30 24 25 20 25 19 23 19 23 United Kingdom Source: Grant Thornton IBR 2009 European Union

Support of lender

more than three-quarters of PHBs in the UK class lenders as supportive or very supportive towards their business, above the EU average (63 per cent) seven per cent of PHBs in the UK class lenders as unsupportive or very unsupportive towards their business, below the EU average (11 per cent).

Figure 8: Level of support provided by lenders Percentage of businesses 45 40 35 30 25 20 15 10 5 0 37 20 Very supportive 42 43 Supportive 15 26 5 8 2 3

Neither Unsupportive supportive or unsupportive

Very unsupportive

United Kingdom

European Union

Source: Grant Thornton IBR 2009

Business planning

18 per cent of PHBs in the UK have a formal business planning process accounting for less than one year. This is just below the EU average (28 per cent) product innovation (19 per cent) and cost cutting (17 per cent) have been the most successful initiatives introduced by PHBs in the UK to increase profits across the EU, product innovation (22 per cent) and productivity review (14 per cent) have been considerably more successful initiatives than in the UK.

Figure 9: Successful initiatives that have been put into place to increase profitability Percentage of businesses Product innovation Cost cutting New management structure Strategic investment Pricing strategy Productivity review Expansion of workforce Brand re-design Outsourcing Use of external advisors 19 22 17 16 16 12 13 13 10 10 9 14 6 4 4 2 2 3 0 1 United Kingdom Source: Grant Thornton IBR 2009 European Union

The Grant Thornton International Business Report (IBR) is an annual survey of the views of senior executives in privately held businesses (PHBs) all over the world. Launched in 1992 in nine European countries the report now surveys over 7,200 PHBs in 36 economies providing insights on the economic and commercial issues affecting a segment often described as the engine of the worlds economy. In the United Kingdom 500 PHBs were surveyed across all industry sectors. These businesses ranged from medium to large in size with numbers of employees varying from 50 to 499. To find out more about IBR and to obtain copies of reports and summaries visit: www.internationalbusinessreport.com. The site also allows users to complete the survey and benchmark their results against all other respondents by territory, industry type and size of business. Participating economies Argentina Armenia Australia Belgium Botswana Brazil Canada Chile Mainland China Denmark Finland France Germany Greece Hong Kong India Ireland Italy

Japan Malaysia Mexico Netherlands New Zealand Philippines Poland Russia Singapore South Africa Spain Sweden Taiwan Thailand Turkey United Kingdom United States Vietnam

www.gti.org www.internationalbusinessreport.com 2009 Grant Thornton International Ltd. All rights reserved. Grant Thornton International Ltd (Grant Thornton International) and the member firms are not a worldwide partnership. Services are delivered independently by the member firms.

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