Confidence is rising but economic volatility may exceed forecast

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An illustration demonstrating varying outlooks of economic confidence

IoD members have a great deal of confidence about prospects for their own companies this year than a recovery in the wider economy…

It helps to be an optimist – particularly if you want to be senior and successful in business. In a Policy Voice survey, we asked IoD members about their confidence for 2016, from both their own company’s point of view, as well as what they expected from the wider economy.

The results were clear: 37 per cent were optimistic about the general economy against 23 per cent who were pessimistic, but when rating their own firms, a much more positive picture emerged with 62 per cent being confident, against only 13 per cent who were to a greater or lesser degree despondent. This enthusiasm was tempered by an expectation that we voted to remain in the European Union. But looking beyond this, how does the IoD assess the results of the survey?

IoD members think that the Office for Budget Responsibility’s (OBR) forecast of 2.4 per cent growth next year and 2.5 per cent the year after seems a bit optimistic. From the IoD’s point of view, member doubts over the slow and steady OBR growth forecast are accurate. Reality is rarely as sanguine as economic forecasters expect, and we are as certain as we can be that the economy will experience greater volatility than forecast – particularly given that tricky EU referendum in June.

Confidence rising

When considering their own companies’ prospects, members take a more positive outlook than they do about the whole economy. Twice as many executives are looking to see improving, as opposed to declining, revenues and profits. This confidence spills over into an expectation for greater investment and demand for people to continue investing.

In our predications for 2016, the IoD forecast corporate profits to have peaked in 2015. We stick by this and while we would like to be wrong, we believe that while some companies will do very well indeed, overall revenue and profit growth will slow, even if it remains positive over the course of 2016.

More positively, there remains a good deal of spare capacity (49 per cent report spare capacity), so there is little inflation threat. At the same time many members believe that the economy remains too fragile to be hit by a rise in interest rates. We are more upbeat about the robustness of the recovery to date, and we continue to watch this whole situation closely.

Finally, looking to the possibility of pay rises, these are critical to a sustainable economic expansion. Estimates are that by 2020 as many as three million people may get a rise as a result of the introduction of the national living wage (NLW).

But the open question is: have businesses fully priced in the NLW, along with the apprenticeship levy and pensions auto-enrolment, and if not, will that preclude them from making pay awards to the rest of the workforce? IoD members seem to be optimistic, and we hope they are right.

To read more from James Sproule click here

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About author

James Sproule

James Sproule

James Sproule has been Chief Economist and Director of Policy for the Institute of Directors since January 2014. Prior to joining the IoD James led Accenture’s UK Research and Global Capital Markets Research. He started his financial career as a merchant bank economist working with both Bankers Trust, Deutsche Bank and Dresdner Kleinwort, and eventually helped to found the boutique bank Augusta and Company.

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