Business sentiment softens after strong run

• The economic prospects index in November posted the largest monthly fall for 18 months, but it comes on the back of record highs in the previous two months and it suggests a maintenance of current robust pace of growth rather than a slowdown.

• Companies’ perceptions of their own trading prospects fell slightly in November, but it is equivalent to the previous 3-month average. Moreover, the index of expected staff levels in the coming year rose.

• Overall optimism fell in the industrial and consumer services sectors, but rose in business and other services. It also softened among firms in the Midlands and the South, but remains higher than companies in the North.

THE FALL IN SENTIMENT SUGGESTS GROWTH WILL STABILISE AT CURRENT ROBUST LEVELS

UK companies’ confidence about economic prospects compared with three months ago fell 13 points to 50 in November, the largest fall since May 2012, which was during the indeterminate outcome of the Greek elections, resulting in a renewed rise in euro periphery spreads. The decline in the economic prospects index this month is on the back of successive all-time highs in both September and October. Hence, despite the fall, it remains at a relatively elevated level consistent with economic growth in Q4 being at least as strong as in Q3. Indeed, the share of companies more pessimistic about economic prospects was basically in line with the recent monthly average, while there was a rise in the proportion of ‘neutral ’ firms at the expense of ‘optimistic’ firms (see Table 1).

The survey’s other main question regarding companies’ perceptions of their own business prospects fell slightly, by 2 points to 57 in November, which is equivalent to the average level of the previous three months (Table 2). Moreover, the net balance on staff levels in the coming year increased 15 points to 42, the highest level since June 2011 when the question was first asked - a further sign that firms do not seem to be anticipating a marked slowdown in economic growth. Chart A shows the trends in both the economic and business prospects.

CONFIDENCE ROSE IN BUSINESS & OTHER SERVICES, BUT FELL IN OTHER SECTORS

Overall economic and business confidence continues to lag behind among companies in the North, though it was little changed on the month. In contrast, overall confidence among firms in the South and in the Midlands - while still higher than in the North - registered declines in November. From a sector perspective, overall economic and business confidence fell quite sharply in the industrial sector which now lags behind both the consumer services and business & other services sectors. The latter was the only sector where overall confidence rose in November (chart B).