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OUR SURVEY SIGNALS SOFTER GROWTH IN THE FINAL QUARTER
The Lloyds Business Barometer survey provides the first snapshot of sentiment in the fourth quarter of 2012 covering the whole economy, after the ONS reported that economic growth resumed in Q3. The latest survey results show a mixed start to the quarter: firms’ sentiment regarding economic prospects rose to their strongest level since April, but confidence about their own business prospects fell to the lowest level this year. Specifically, the economic prospects index rose 7 points to +17, while the business prospects index fell by 17 points to +26. We focus on two key questions in this month’s report: (1) why is there a divergence between economic prospects and business prospects?; (2) what might this mean for growth in the final quarter?
On the first question, we have noted before that fluctuations in the Business Barometer survey have largely reflected changes in the intensity of the euro crisis in the past year or so. In fact, the economic prospects index in particular has correlated closely with the euro crisis, proxied by average 10-year peripheral-bund spread in chart A. The improvement in economic prospects this month therefore seems to tally with a further compression of peripheral spreads, which began in anticipation of the ECB’s announcement of its bond buying programme in the summer. In addition, other policy measures, such as further quantitative easing in the US and UK and the UK Funding for Lending Scheme are likely to have helped to support risk appetite.
However, this month’s survey also shows that companies’ own business prospects did not improve in tandem with economic prospects. Instead, the decline in business prospects mirrors falls in the survey’s supplementary questions on staff levels, profit margins and average domestic prices. Moreover, the manufacturing sector recorded the largest fall in business prospects, suggesting that demand from the euro area remains weak and that activity in the rest of the world has slowed in recent months. Chart B shows that manufacturing registered a fall in economic and business prospects, in contrast to no change in retail and a rise in other services.
This brings us to the second question on what the survey results mean for economic growth in the final quarter. The latest survey results are consistent with broadly flat activity at the start of Q4, as chart C illustrates. Combining the economic prospects and business prospects indices in a simple probit regression model shows that the probability of recession was only around 15% last month and therefore anticipated the exit from technical recession in Q3, which was subsequently confirmed by the ONS release. The probability of a renewed contraction has risen to only about 30% this month (chart D) and is therefore not signalling a ‘triple-dip recession’. The key development to watch next month is whether the fall in the business prospects index proves to be transitory.
Note: This month’s Lloyds Bank Business Barometer was conducted during 1-15 October 2012. The sample size was 300 companies with turnover above £1 million from all sectors and regions. Responses are re-weighted to reflect the composition of the economy.
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