A question of confidence

European small and medium-sized firms’ confidence about their business prospects has taken a knock following the events of 11 September. The European Business Survey (EBS) from financial and business advisers, Grant Thornton, and forecasting consultancy Business Strategies, shows the sharpest drop in business optimism in the survey’s 10-year history.

While it was expected that optimism levels would be lower than during 2001, which saw businesses riding a wave of confidence, the extent of the drop in confidence in 2002 shows just how pessimistic businesses are in the wake of the terrorist attacks.

Research for the 10th European Business Survey, due to be published in March 2002, was carried out between 11 and 30 September among almost 4,500 European SMEs. It remains the only survey of its type to be undertaken among small to medium-sized enterprises on a European-wide basis and therefore provides a unique insight into the state of mind of many businesses immediately after the attacks in the US.

In the survey businesses were asked about their forecasts for the coming year and whether they thought, for example, that their turnover and output would go up, go down or stay the same. From the difference between the proportion of companies saying their turnover and output would go up or down an optimism/pessimism balance was achieved.

Optimism was not expected to be maintained at the record levels of last year when Europe’s small and medium-sized firms were the most optimistic seen in the survey so far. When asked about their business expectations for turnover and output for the coming year there was a drop in the optimism/pessimism balance in EU countries of 26 percentage points from 61% in 2000/2001 to 35% in 2001/2002.

Dr Neil Blake, research director at Business Strategies comments: “In previous downturns, we have seen a drop of 11-12 percentage points in overall confidence on turnover and output. This year shows a fall twice as large as that. The economic scene has been worsening for several months in some of the larger European countries, as well as the US, and the events of 11 September have clearly affected the outlook.”

However, the results do not spell as much bad news for business prospects as may first appear. Even after recent world events, business confidence levels have only dropped to the levels of 1996/1997, when many businesses were growing in confidence after the last recession. This shows that businesses are, in fact, in a good position to weather any worldwide slowdown.

UK businesses more positive
UK SMEs remain slightly less optimistic about their turnover and output than the European average (35%), with an optimism/pessimism balance in 2001/2002 of 33%. However, while only slightly behind the EU average, this is a fall of 25% from the levels of last year.

The UK sits squarely in the middle of the table for turnover and output, with an optimism/ pessimism balance of 33%. The least optimistic countries are Germany, Turkey and Austria with optimism/pessimism balances of 15%, 22% and 25% respectively and the most optimistic are Norway, Greece, Italy and the Netherlands with balances of 65%, 60%, 55% and 55%.

The results of the survey are reinforced by other recent studies. In July and August 2001 Grant Thornton surveyed 2,400 UK owner managers as part of the Owners’ Day seminar programme and 50% of those respondents cited building the value of the business as their greatest concern for the coming year. This commitment to strengthening the business and regarding the future with a long-term outlook is shown in the 2002 results where UK SMEs appear more prepared for the future than many other European countries.

The optimism/pessimism balance for employment, where businesses were asked whether their number of employees would go up, go down or stay the same, stands at 17%, against a European average of 10%. This is encouraging, but UK businesses are still 13% less optimistic about their employment prospects than at the time of last year’s study.

UK SMEs appear to be confident that they are building a profitable business, with 12% envisaging a rise in profitability over the coming year, compared to the Europe-wide figure of 10%.

Export predictions hit hard
The area in which optimism has taken the most severe blow, according to this year’s survey, is the potential to do business in international markets. The UK emerges as the country that is most fearful of its continuing ability to trade with other countries, with an optimism/pessimism balance of just 5%, the lowest result in the entire sample and a 16% drop compared to last year’s results. This is perhaps understandable, given the UK’s level of trade with the US.

Portugal emerges as the second most pessimistic country in terms of exports, with a balance of 7%, compared to the European average of 15%, which is a new low for the decade that the survey has been carried out.

Andrew Godfrey, head of international and European services at Grant Thornton, comments: “The results of the EBS survey show a natural immediate reaction to the events of 11 September and the downturn in world markets, but they are not all doom and gloom. They demonstrate that SMEs are going through a difficult period but remain cautiously optimistic about the future of their businesses. In areas where SMEs are taking a longer-term view, they expect to continue to invest in crucial areas such as research and development and training.

“We have seen a rise in the proportion of SMEs involved in exporting over the last few years and it is important that they do not neglect their export markets during the current downturn. We would now urge SMEs not to be sidetracked and lose motivation, but to keep business plans up-to-date, keep a tight control on cash flow and look for opportunities to grow and gain market share. There is a wall of cash to help support those with a good business plan, strict financial controls in place and a vision to succeed.”