West Midlands businesses still lack the confidence to invest for growth, as weak domestic demand and cost pressures continue to dent profits, meaning that economic prospects remain fragile, according to the latest Business in Britain report from Lloyds TSB Commercial.  

John Robson, regional director for Lloyds TSB Commercial in the Midlands and North, said: "With domestic demand in the doldrums, and confidence still muted, it is understandable that firms in the West Midlands are worried about investing for the future. But the fact is that if businesses do not invest it could damage an already fragile recovery, and result in even slower growth."

Lack of investment

The six monthly report, now in its twentieth year, canvasses the views of more than 150 businesses across the West Midlands and shows that 16 per cent of business expect to increase their level of investment over the coming six months, while 19 per cent plan cuts. This means that the overall balance of firms planning investment is in negative territory at minus three per cent, and has actually fallen since the last survey in January, when the balance was minus one per cent.

John Robson added: "Getting access to finance is critical if businesses are to invest effectively and we want to send out a clear signal that Lloyds TSB is lending to good businesses and that we are doing so fairly and competitively."

Confidence a little higher but still low

The survey's key Business Confidence Index, which is based on businesses' expectations for sales orders and profits over the next six months, has risen, to 15 per cent, from 12 per cent in the previous survey.  

Confidence has been helped by a rise in the number of companies expecting stronger sales, and a stable outlook for order books, but profitability is still a real concern and has had an impact on firms' overall sentiment for the rest of the year.  

Sales and exports

A continuing trend is that firms with exposure to overseas markets are faring better than those reliant on home markets, where conditions are weak. Over two fifths (40 per cent) of West Midlands firms say they expect to boost exports over the coming six months, and with no businesses expecting a decline the overall balance of businesses expecting to increase exports has now reached 41 per cent, compared to 34 per cent in the last survey.

Strong export trade has underpinned the general strengthening of sales expectations that has helped to support overall confidence. However, buoyant international demand belies a much more subdued outlook at home. Weaker UK demand, for 56 per cent of respondents, is still by far the biggest threat to their business.

Prices and profits

Businesses have followed through on plans to increase prices since the last survey in January. Over two fifths (43 per cent) of businesses have pushed up prices over the past six months, while 19 per cent have cut prices. This represents an overall balance of 24 per cent. This trend is expected to continue, with a balance of 33 per cent of firms planning price increases over the coming six months.

Despite these plans to raise prices, West Midlands businesses are not expecting an increase in profits after recent falls. Over a quarter (28 per cent) of firms expect higher profits over the next six months, while 30 per cent expect to see a fall.

The economic perspective

Trevor Williams, Chief Economist, Lloyds Bank Corporate Markets, said: "Businesses are on a better footing than they were at this point last year but they need to steer the right course between domestic and international markets in order to ensure their prospects for the coming year are positive. Investment at home is vital if businesses are to stay competitive, but with domestic trade prospects still weak businesses need do more to tap into export markets to ensure they grow in the longer term."

"As inflation is expected to peak later this year or early in 2012 and the underlying economic recovery remains intact, the hope is that businesses that are currently putting plans on hold will have the confidence to ramp up their investment spending. Investment is the springboard for innovation and productivity, which in turn supports competitiveness - and ultimately economic growth. 

"Our latest report underlines the view that the pace of economic recovery is still sluggish but, risks notwithstanding, we believe the recovery will continue in the second half."