Why business confidence is all over the place
Kemi Badenoch looked aghast but Keir Starmer was defiant. Business confidence was at a nine-year high, the prime minister declared in the House of Commons in mid-July. The Conservative Party leader was not having any of it. Neither were many economists and analysts watching from the City.
What Starmer claimed was not false, per se. Research by Lloyds Bank showed business confidence to be edging up to historic highs. But the outcome of Lloyds’ research was counter to similar reports from the Institute of Directors (IoD), the Confederation of British Industry (CBI), the British Chambers of Commerce (BCC) and the Institute of Chartered Accountants in England and Wales (ICAEW), all of whom said confidence was in negative territory.
The IoD went as far as to warn confidence had hit a historic low, largely driven by the blowback of last autumn’s giant tax raid, while others have noted varying degrees of negative responses or mild optimism.
Murmurings about Lloyds’ findings – widely referred to as an “outlier” – have spread around the City and among several business groups. Keen watchers of any growth indicator have questioned Lloyds’ results. Industry wonks have been trying to make sense of the fancifully high levels of optimism reported in its Business Barometer.
It has been hard to square those figures with the defeatist vibes weighing down on Brits up and down the country. There is also some consternation that its survey may be lessening the impact of other survey results that show opposite trends, undermining the influence researchers can have on investment decisions and policy-making.
Lloyds Bank declined to comment when it was approached to discuss its findings and methodology. Economists have clashed over its findings, with some pointing out that more negative surveys show how bosses are more likely to be critical of the wider UK economy’s prospects rather than their own.
Peel Hunt economist Kallum Pickering has pointed out that the IoD’s business confidence survey, which showed a nine-year low in sentiment, would be more positive if it incorporated answers on bosses’ expectations about their own firms rather than about the wider market.
But this point is also seen as a potential weakness.
“A business will always have more confidence in its own ability to run itself and it will always have less confidence in the government’s or other businesses’ abilities to run themselves,” Anna Leach, chief economist at the IoD, told City PM.
No one is ‘more right’ about business confidence
Responses can also vary according to how businesses are able to trade and who fills out questionnaires. The IoD tends to get responses from more senior-level staff, who may be more anxious about business prospects. Top company bosses may be more swayed by new policy announcements, deal outcomes and alterations in forecasts.
Tax threats are also often a prominent feature of industry surveys in the lead-up to Autumn Budgets and, with a tax raid worth £50bn possibly coming for investors and businesses, warnings have already been added into the small print of reports published this summer.
Lloyds Bank, however, only asks executives at companies with turnover above £250,000, preventing many smaller businesses, which may be more vulnerable to small changes in balance sheets, from voicing their troubles. Respondents may cheer the government’s longer-term strategies, including industry policy papers on key growth areas, than be nervous about short-term decision-making.
Lloyds also adjusts its survey data to match proportions in sector, region and size of the wider UK population calculated by the Office for National Statistics – unlike several other surveys. This can make it mirror trends seen in the UK’s GDP data but it can also be volatile depending on how large businesses respond each month and how positive overseas trading is.
As a £50bn bank with most of its 30m customers being based in Britain, it can claim to have access to big UK businesses. That also suggests there is a strong incentive for a glass half-full approach to reading economic data – but that doesn’t mean it’s unfairly massaging the numbers.
“I think you would be wrong to try and come down on one side or the other of that particular debate of who’s ‘more right’ on business confidence,” said Simon French, chief economist at the investment firm Panmure Liberum.
“I think, to some extent, the noise in the data just reveals the composition of those surveys, rather than one doing a better job of being a macro-reflective picture than anything else.”
Some research takes a more focused approach. The CBI asks its members about private sector growth in the next quarter while Santander asks about trade prospects, GfK tracks consumers’ views and the Society of Motor Manufacturers and Traders (SMMT) follows sales of vans as an indicator of whether businesses have the confidence to invest in a new fleet.
Across the piste, industry groups, banks and consultancies insist on their authority over data points, which if given credence, can have profound ramifications for the UK economy. Each new release generates punchy headlines and fuels debates over the UK economy, boosting survey providers in the process.
The sprawl of data churned out by spreadsheet-savvy comms officials and nerdy lobbyists risks making decisions for prominent economists harder to think through. The frequency with which reports are released, and the suddenness with which they appear to jump between positive and negative outputs, has led to calls for reports to be published less often to allow a clearer picture to emerge.
The Bank of England and government departments conduct their own surveys, though they have not been without their own flaws. The Bank’s review into its processes, conducted by former Federal Reserve chairman Ben Bernanke last year, called into question the “adequacy of [its] forecasting infrastructure” including the quality of its data inputs and the reliability of its software. The UK’s Office for National Statistics has also been open about issues in the quality of its Labour Force Survey, citing challenges in data collection.
Surveys have their critics
Officials have often turned to S&P Global’s flagship purchasing managers’ index (PMI), which surveys hundreds of firms and follows trends across 47 of the world’s largest economies, as a point of reference.
Its monthly release provides an indication of three important sectors – services, manufacturing and construction – and has long been the envy of competitors because it is so closely monitored. Its figures are used in the Recruitment and Employment Confederation(REC)/KPMG’s flagship survey on the UK jobs market.
S&P Global weighs responses according to sub-sectors and workforce sizes while companies are chosen to reflect the size of sectors in data published by the ONS and other official statistics bodies across the world. Acting at a slight distance from financial markets, the ratings agency claims to be able to report on confidence and economic trends with some authority.
But it does have its own critics – like every other survey provider. Matt Swannell of EY ITEM Club, who shares his analysis of PMI figures after each release, says readings can be “taken with a pinch of salt” given its “erratic” surveys have been relatively pessimistic.
The significance of surveys is not lost on forecasters and top policymakers. A GDP analysis paper in June by a Bank of England economist, Andre Moreira, said “timelier and smoother” results were “among the best leading indicators of UK GDP growth” due to the ONS’ estimates being based on information about output rather than expenditure.
“This creates a clearer conceptual link to business surveys, whose precision is nevertheless limited by the fact that these are qualitative ‘net balances’ – simple summary measures of directional –‘up’, ‘down’, ‘same’ – responses,” the paper said.
The Bank’s own Monetary Policy Report makes multiple references to top surveys, including that of Lloyds Bank. Government officials are also clearly keeping a close eye on business confidence surveys given high optimism has been Starmer’s fallback anytime he is asked about crippled public finances and imminent tax rises.
Leading business researchers have tried to come together to find some common ground in the past. It has been suggested that Lloyds Bank would be questioned on its methodology. The stark contrast between the surveys has left some on edge.
Unless lawmakers and interest rate-setters are satisfied with only looking at the state of the UK economy in the rear view, given the ONS only publishes key economic data over a month late, the chaos of business confidence surveys will have to make do.