Our research suggests UK businesses are more confident in the global economy than in their domestic economy.
Our 12th Global Capital Confidence Barometer found a consistent pattern in business sentiment: corporates across the globe were much more confident in the outlook for the global economy than they were for their own domestic economy. This was true for all of the major economies we surveyed with the exception of Spain, where the recovering domestic economy was reflected in a positive surge in local business sentiment and India, where corporate sentiment was almost balanced between local and global views, reflecting the increased confidence in the Indian economy that we have seen in recent months. But these 2 countries were the exceptions.
Reported UK business confidence was very much in line with the observed global trends: 91% of UK businesses reported confidence in the global economy improving over the next year but only 45% saw the UK economy improving over the same period. This was also reflected in relative confidence in future earnings: 99% of UK businesses were confident in global earnings but only 62% were confident in UK earnings.
Based on the research, we forecast that UK business were increasingly likely to turn to international acquisitions as the major part of their acquisition led growth strategies. UK businesses would move to acquire companies with strong earnings in markets expected to grow, rather than in a UK economy that they were somewhat more uncertain about. The ONS has now published first quarter data for UK M&A and we can now explore how our findings and predictions sit alongside actual results.
Still no sign of a significant upturn in UK M&A…
The ONS M&A data for Q1 reveals little sign of an increase in UK M&A activity with the results confirming that UK transaction volumes remain very low by historic standards. There were 90 transactions in total involving UK companies in the first quarter of 2015, compared with a quarterly average of 289 between 2002 and 2006 and 255 over the longer period of 1997 to 2014. M&A activity has yet to recover from the impact of the financial crisis.
…either by domestic oriented businesses …
In the first quarter there were only 28 transactions between UK companies which is the lowest figure since records began in 1969. The average volume of deals between 1997 and 2014 was 193 a quarter which illustrates just how low this figure really is in historic terms. The same story holds for average deal value which at £1.1 million is around one sixth of the £6.4 million average value between 1997 and 2014.
…or by foreign investors…
It is the same story for investment into the UK by foreign companies with only 21 transactions completed, the lowest first quarter volume since 1988 and some way off the long run average since 1997 of 49 transactions per quarter. There was a better story on average values with the Q1 performance about half the average value of deals since 1997.
…but the story is more positive on outbound transactions.
The one positive note was the increase in the volume of outbound transactions: UK businesses acquiring foreign companies. In Q1 2015 there were 41 acquisitions, an increase of 71% on the average number between 2012 and 2014 and about half the long-term average volume of activity. On values, performance was much stronger with the average deal value of £8.5 million being higher than the running average since 2001.
So should we worry? Does the UK have a confidence problem?
It is clear that the financial crisis has cast a long shadow and any stumbles or increased uncertainty surrounding the UK economy quickly transmit to business confidence and activity levels. As the EY ITEM Club Spring forecast noted, UK business confidence has fallen since the end of Q3 2014.
The CCB results also suggest that the true level of confidence in the UK economy is almost certainly lower than the headline figures. UK business confidence is a mix of higher confidence in the global economy and lower confidence in the UK, so it is likely that the average overstates actual confidence in the domestic outlook and points to a more fragile environment than we have been assuming.
The hope is that the decline in confidence was due to increased political uncertainty at the end of 2014 and that with the General Election now over, businesses will start to move forward. However, as shown by our UK Attractiveness Survey, the looming EU Referendum is likely to impact foreign investor confidence. The M&A performance in the first quarter suggests that confidence remains fragile and there is likely to be a rocky road ahead.