R3: Economic upturn is more than just a blip

Wednesday 18 June 2014

Limited company contractors and sole traders will be comforted to hear that the recent economic upturn, which has helped to stoke demand, is more than just a flash in the pan.

Speaking about the findings of the latest Business Distress Index from R3, Giles Frampton, R3 vice-president, explained that the repeat performance of strong figures "gives weight to the idea that the economic upturn in the last six months was more than just a blip".

The index showed that business distress is now at an all-time low of 33 per cent, with growth reaching near record highs.

After tracking five key indicators of business distress since March 2012, it was revealed that all areas are now at near record lows. These include the regular use of maximum overdraft facilities, decreasing profits, falling sales volumes, declining market shares and new redundancies.

The share of businesses reporting at least one sign of distress now stands at 64 per cent, which is the same percentage as when the survey first began in March 2012.

"Historically, business failures increase as the economy bounces back: rapid economic growth can be a problem for a business that used up cash reserves in a recession or that isn't prepared for expansion. However, low interest rates and the much slower recovery we have had up until the last nine months or so have brought struggling businesses time to sort out their problems," Mr Frampton said.

The index also revealed that businesses are starting to see more positive conditions. Thirty per cent have witnessed an increase in profits, while 34 per cent have experienced rising sales volumes. Twenty-eight per cent have managed to grow their market share, 37 per cent have invested in new equipment and 28 per cent have expanded.

Conditions are likely to continue to strengthen too, as economic growth gains momentum in the UK.

The British Chambers of Commerce (BCC) recently upgraded their initial prediction for the year, claiming the economy will expand 3.1 per cent, opposed to their initial estimate of 2.8 per cent.

Growth has also been revised upwards for 2015, going from 2.5 per cent to 2.7 per cent.

If the economy expands by 3.1 per cent this year, it will be the first time the marker has been above three per cent since 2007.

The BCC estimates that GDP will hit its pre-recession Q1 peak by the end of Q2 this year.

However, John Longworth, BCC director general, claims there is still work to be done to ensure the positive conditions can be sustained over the long-term.

Indeed, while the Business Distress Index is heading in the right direction, it is clear there are still considerable pain points for organisations.

Mr Longworth said growth rates will slow down over the next two years, which indicates that the UK is too reliant on consumer spending as a means to drive growth.

What's more, the current increase in business investment is taking place from a low base. The BCC claims organisations need assurance from the government and the Bank of England that this will be sustainable over the long-term.


By Victoria McDonnell

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