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Profits down but confidence increasing

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The Institute of Directors released the results of its Business Opinion Survey for the first quarter of 2002 (March) today which showed a slippage in company performance, lower capacity utilisation and weaker profits, despite better output growth over the past three months and a sharp recovery in optimism. However, all the forward indicators improved, especially export orders and expected profits. The IoD attributed some of the improvement to a generally better business climate and part to a recovery from the first instinctive reaction to 11 September events in the final quarter of last year.

The IoD said that business optimism jumped in the first quarter to its best level since the second half of 2000, after slumping in the previous quarter. The balance of companies which were more, rather than less, optimistic about their company’s prospects (relative to the previous quarter) in March was 40% which compared with 10% in December and 23% in September. The collapse in December, in retrospect, did seem to be an instinctive reaction to the 11 September terrorist attacks in the US.

Reported profits, however, were the worst since December 1998 as cost increases continued to outstrip price increases, and company performance slipped further even though the majority of respondents reported that their companies were still performing well. The balance of those companies performing well, minus those performing badly, was 67% compared with 72% in December, 76% in September and 80% in June. But output growth recovered a little after slipping for much of the previous two years. The balance of directors reporting higher output minus those reporting lower output was 36% in March compared with 33% in December and 38% in September.

Forward indicators were all better. Both total order books and, especially, export order books were higher. The improvement in export order books was especially sharp and followed a very nervous slump in the final quarter of last year. The balance of those companies reporting above normal order books minus those reporting below normal order books was +4% in March compared with -17% in December and -1% in September.

Price pressures remained weak, with many more respondents reporting increased costs than increased prices – putting a squeeze on margins. Average settlements were around 4.0% in March, down on December’s 4.6%.

Manufacturing industry continued to under-perform the general economy but the gap between manufacturing and the rest of the economy was narrower after widening significantly in December. Export order books staged a significant recovery.

Ruth Lea, Head of the Policy Unit, said:

“Our latest survey, on the whole, suggests that the economy is recovering despite some weaker numbers for company performance. Business optimism has ‘perked up’ after collapsing in December – though we believe that much of December’s slump was a instinctive reaction to events of 11 September so the figures should be interpreted with some caution. The improvement in export orders is especially encouraging. Another encouraging feature is the sign that manufacturing may be picking up after, what has undoubtedly been, a nasty recession. Margins throughout the economy are, however, still being squeezed by cost increases outstripping price increases.

“We now expect GDP growth of around 2% this year, with growth coming from both the public and the private sectors, and inflation, on the whole, should remain benign for the rest of the year. But, given buoyant consumers, a hot housing market and assuming a fairly neutral budget, we expect higher interest rates this year. The first hike is likely before the end of June.”

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