East of England firms are growing in confidence, buoyed by a more positive outlook for Europe and are hoping for a boost to business activity and profits in the first half, according to a report from Lloyds TSB Commercial.

It suggests that optimism is at its strongest level since the economy came out of the initial recession in 2009, driven by stronger profit expectations but also by a better outlook for sales and orders. In the East Midlands and East of England, an index of likely sales orders and profits for the coming six months has increased to 20 per cent, from 12 percent in the previous survey.

But employment and investment intentions for the next six months have only moderately increased, suggesting that companies remain cautious about future hiring prospects and capital projects.

The twice yearly report, now in its 21st year, canvasses the views of 1800 UK businesses, including 345 in the East Midlands and East of England.

Gareth Oakley, regional director for Lloyds TSB Commercial in London and East, said: “It is good to see that businesses in the East of England have managed to work through the tough economic headwinds of the last couple of years and have a rather more positive outlook for 2013. Businesses are clearly feeling more optimistic about Europe and, after a poor 2012, we should see more demand and orders coming through from the continent over the coming months.”

Prospects for the first half of 2013 look more positive with expectations for total sales and orders in the next six months – two of the key barometers of business confidence - both improving.  Over a third (37 per cent) of businesses in the East of England said that they expect orders to increase during the first half of the year, compared to 12 per cent that think orders will fall. This results in a 25 per cent overall net balance expecting orders to increase.

Almost half of businesses in the East Midlands and East of England (45 per cent) stated that they think sales will increase in the next six months, 19 per cent expect a  decline, leading to a 26 per cent overall net balance expecting sales to increase.

Rising profits

The rise in confidence is also fuelled by an expectation of an increase in profits. The net balance for businesses in the East Midlands and East of England expecting increased profits over the next six months improved for firms of all sizes. Almost a third of businesses (32 per cent) anticipate an increase in profits and a less than a quarter (22 per cent) expect a drop in profits. The resulting net balance of 10 per cent is up on July 2012 when it stood at minus six per cent. There was a particularly strong lift for companies with turnover above £5m, despite slightly lower net balances for expected sales and prices for this category.

Investment weak

Despite this more upbeat outlook, businesses in the East Midlands and East of England are still on their guard. The report shows that almost half of firms (46 per cent) state that their investment will stay the same over the next six months; a fifth (20 per cent) plan an increase; and a further fifth (20 per cent) believe they will need to cut investment in the first six months of the year. Despite the balance of zero per cent being an improvement on July 2012 when it was minus three per cent, this figure does remain relatively weak by historical standards.

When asked what the greatest threat to their business would be over the next six months, the most common fear – cited by 47 per cent of businesses was weaker UK demand. A further fifth (19 per cent) stated that employment and regulatory concerns as the biggest threat to their business.

Gareth Oakley continued: “Despite the good news that businesses are feeling more upbeat about trading in 2013, weak domestic demand is still a major concern for businesses in the East of England. In order for UK growth to prosper it is essential that banks, government and professional advisers do all that they can to provide the right trading environment to ensure businesses can seize opportunities and develop.

Exports to Europe expected to bounce back

The survey shows that exports to Europe are expected to rebound quite strongly, reflecting hopes that policy measures undertaken by the European Central Bank to support the Euro area economy will lead to a strengthening of demand.  In particular, the anticipated growth in sales and orders over the coming six months could reach a level last seen more than two years ago when the economy was in the initial stages of the recovery and this is likely to be driven by a growth in trade with Europe.

A closer analysis shows that almost a quarter of firms (22 per cent) in the East Midlands and East of England expect to grow their total exports to Europe during the first half of the year, but 15 per cent are expecting exports to drop, resulting in an overall net balance of seven per cent saying exports to the continent will still rise. This is an increase from July last year when the overall net balance stood at minus five per cent.

Businesses in the East Midlands and East of England also continue to feel optimistic about exports to the rest of the world. Over a quarter of businesses (28 per cent) anticipate an increase in exports to the rest of the world, compared to 13 per cent of businesses who believe exports will be down. This results in a net balance of 15 per cent.

Most companies expect to maintain current staffing levels

Almost three quarters of companies (71 per cent) in the East Midlands and East of England have stated that they are likely to keep staff levels unchanged which is similar to July 2012 when 65 per cent of businesses stated that they expect to keep levels the same. Meanwhile, 14 per cent of companies say they anticipate an increase in staff numbers over the next six months and a similar number (11 per cent) believe that they will need to make cuts.

Business confidence in the East of England is 20 per cent, higher than the national average of 19 per cent, and a large increase on the 12 per cent seen in July 2012. London and the South East stand out as having seen the largest increase in business confidence over the next six months with a confidence balance of 22 per cent and 20 per cent respectively compared to July when it stood at 13 per cent and eight per cent respectively.

The smallest rises were in the West Midlands where the overall net balance is 20 per cent in January compared to 19 per cent in July. Similarly, there was little movement in the South West and Wales where the net balance stands at 16 per cent compared to 13 per cent in July 2012.

The economic outlook for 2013

Trevor Williams, chief economist, Lloyds Bank Commercial Banking, said: “Policy measures undertaken by the European Central Bank and EU officials are beginning to filter through and businesses show greater optimism about their trading activity over the next six months, especially of exports to the Euro area. These glimmers of hope should lead to a gradual increase in the underlying pace of economic expansion over the forthcoming year.

However, one area of continued concern is weak UK demand. A lot of UK companies are sitting on cash rather than investing, but for the economic recovery to become enduring, that money will have to start being spent.”