Spring gives way to winter gloom

Businesses are increasingly gloomy about their prospects as slowing economic growth and rising costs - which they are not passing on to customers - hit their profit margins.

A new survey by the CBI and the Regional Development Agencies, taking in all sectors of the economy, reveals today that employers are less optimistic about the general business situation than they were in the Spring.

Orders, output and jobs have all increased over the last year but at a much slower pace than in the year to Spring. The rate of the slowdown has also been greater than expected.

Looking ahead, the biggest inhibitor to growth is seen as red tape and regulation, according to the Autumn Regional Survey of UK Economic Trends.

So far, higher energy costs have been absorbed by employers, with only 12 per cent passing on the increases in full to their customers. However, 44 per cent will begin to do so if energy prices remain high, the survey reveals. And in a bid to reduce the impact of the higher costs, 48 per cent would also seek greater energy efficiences and 37 per cent would change their energy purchasing arrangements.

More generally, six months ago a balance of 10 per cent of businesses said their product prices had risen over the year and a balance of 17 per cent predicted this would continue over the next six. But in the latest survey, the balance of employers seeing prices rise remained at 10 per cent and, significantly, profit margins fell for a balance of 21 per cent of companies.

The economic slowdown is more widely reflected in businesses' order books: domestically, orders were up, with a balance of eight per cent, and for exports the figure was two per cent. Both were significantly lower than predicted six months ago, when a balance of 21 per cent expected to see an increase domestically and 11 per cent for export orders.

The theme continues for output, with a balance of 10 per cent saying volume rose in the past twelve months - barely a third of the balance predicted in the Spring (29 per cent). Jobs also increased at a lower rate over the last year than had been expected: a balance of seven per cent in the Autumn compared to the Spring prediction of 10 per cent.

Businesses view regulation and red tape as the biggest inhibitor on further growth - 46 per cent say it is the primary constraint, whilst 25 per cent cite a shortage of available finance. Inadequate government support, transport issues and high labour costs are also named as major factors restricting growth.

Employers say a skilled workforce is their most valuable asset and 66 per cent in England and Scotland fund training for staff, a slight decline since the Spring (70 per cent). Two-thirds use private providers compared to 32 per cent using further education colleges. Management and marketing skills are cited as the most in need of improvement.

Doug Godden, Head of Economic Analysis at the CBI, said: “Businesses right across England and Scotland are suffering, with profit margins squeezed in a pincer movement. Whilst input costs have increased significantly this year, only one in eight companies has been able to pass these rises on in full to their customers in the face of weak demand conditions.

"In this tough business climate, it is clear from the survey that red tape reduction is an area where action would really benefit companies. It is important that the government's deregulation agenda delivers early results."