UK: NO GROWTH IN RETAIL SALES UNTIL 2013

SALES WORRYINGLY WEAK AS CHRISTMAS NEARS

UK retail sales values were 0.6% lower on a like-for-like basis from October 2010, when sales had risen 0.8%. On a total basis, sales were up 1.5%, against a 2.4% increase in October 2010. Food sales growth slowed and non-food sales also weakened, with big-ticket items suffering most. Clothing and footwear were hit by the unseasonably mild weather. Homewares remained tough and often deal-driven. Uncertain prospects for personal finances and the economy continued to make shoppers careful, giving priority to essentials and replacements over discretionary items. Non-food non-store (internet, mail-order and phone) sales growth picked up a little in October after falling back in September. Sales were 11.5% up on a year ago, more than the 10.1% in September but less than in August and than the 12.8% in October 2010.

Stephen Robertson, Director General, British Retail Consortium, said: “Which part of the wave we’re riding varies from month to month but the water is consistently chilly. For a fifth month, total sales growth continues its strangely regular flip-flopping between 2.5 and 1.5 per cent. But, the year-to-date figure, which smooths out these minor moves, is unchanged from the previous month. This is evidence of the basic weakness of consumer confidence and demand and worrying this close to Christmas. Underneath the headline figure, the year-to-date results show almost no growth in non-food sales. Allowing for the VAT rise since last year, that suggests a substantial drop in sales volumes while the food figures indicate very little volume growth. It’s clear customers are cutting back whatever they’re buying. A lasting lift in consumers’ mood needs a sense that better times will come for jobs, costs and incomes. The Chancellor should use this month’s Autumn Statement to help customers and businesses by offering hope over next year’s planned fuel duty and business rates increases.”

Helen Dickinson, Head of Retail, KPMG, said: “With so much uncertainty across European and global markets, UK consumers remain reticent as their personal finances become harder to manage. The beginning of the month continued with the trend we saw at the end of September: the warm weather helped to boost food sales to the detriment of clothing and other non-food sectors. By the end of the month the gap narrowed, food growth slowed and non-food retrieved some of the momentum lost over the previous few weeks. The month overall saw ongoing challenges for big-ticket items and continued high levels of volatility across individual weeks and different sectors. But one constant remains: to whatever extent sales are being made, margins and hence profits are being impacted to stimulate demand as retailers strive to cope with the new reality. The success of the Christmas season for retailers hangs in the balance as October’s results do not set a strong foundation.”

INVESTORS MORE OPTIMISTIC

Stock market volatility has been a dominant feature during recent months – research shows that, since mid-July, large (2+%) daily fluctuations have been five times more frequent than usual. October is proving no different. After a short, sharp sell-off at the beginning of the month, global markets have bounced back strongly with many indices up more than 10% from their lows. So what has been the catalyst for the latest move? In some respects it is very simple: investors have become more optimistic that at long last, after weeks of pressure from bond vigilantes and global leaders, eurozone policymakers are about to tackle the debt crisis by putting together a comprehensive and effective package to address the issue. As leading economist and associate editor of the FT, Martin Wolf succinctly put it, “The broad consensus of the world’s policymakers is that the eurozone must now do the following: divide countries into the insolvent and the illiquid; restructure the debts of the former and provide unlimited, but temporary, support for the latter; and recapitalise the banks, after stress tests that allow for losses on sovereign debt, either from national treasuries or from the European Financial Stability Facility (EFSF).”

So how will the package, to be announced on the 23rd of this month at the EU summit, actually work and, crucially, be funded? The eurozone’s current rescue fund stands at €440 billion; large but insufficient to potentially bail out Spain and Italy in a worse-case scenario. To address this key issue, EU officials have focused on an insurance plan which would involve the EFSF guaranteeing 20–40% of losses on (government) bonds for struggling eurozone countries instead of buying them as the ECB currently does. Depending on how large such guarantees are, such a scheme could leverage the EFSF’s resources to between €1,000 billion and €2,900 billion. The plan, in effect, means that the EFSF gives its word to guarantee underwriting potential losses but without actually handing over any cash. Not that the plan is without risk: the guarantee will include guarantees from Italy and Spain which could, potentially, mean them guaranteeing themselves; and the markets could shy away from such an idea. For now though, investors feel more comfortable that EU policymakers will be forced to deliver a workable solution – large enough to ‘shock and awe’ and to enable longer-term structural reform to take place.

The events of the last two months or so – the eurozone debt crisis and worries over a ‘double-dip’ recession in the West – have, unsurprisingly, dominated the markets and investors’ thinking. Whilst no-one is suggesting the EU will deliver a panacea or that US growth will suddenly jump forward, it is clear that policymakers have now grasped the nettle and begun to take action about solving the debt crisis and restoring growth. The sideways movement of global equity markets has reflected investors’ frustration with the political paralysis so evident until very recently. But after spending much of the last couple of months on macro, geopolitical issues, it is worth focussing back on the fundamental drivers of investment returns over the longer term. There is one successful aspect of investing that has been lost in all the bad news – the importance of dividends to long-term investment returns. It would be easy to think that, with all the market gyrations of late, even this component had succumbed too: nothing could be further from the truth and international investors are slowing waking up to the opportunities that exist for capturing high levels of quality income.

Starting with the basics: dividend income is a fundamental part of real investment because it is about real cash. The amount that a company pays out to shareholders is determined by how much cash it has and is less easy to fudge than, say, explain why it may have missed an earnings target. The other reason to focus on dividends is that they are the most important contributor to total returns from shares, having accounted for almost 90% of total return over the longer term, according to research by Société Générale. The stream of dividends will likely reflect the cash-generative power of the business over time. This in turn means that companies with high, robust and growing dividends tend to be higher-quality companies. The final aspect of dividend income is that it has proven to be an effective way to shield against the effects of inflation: in other words, dividends have grown in real, inflation-adjusted, terms over the long term. By way of example, long-run inflation is 3% (based on the last 100 years) whilst long-run dividend growth has been between 4 and 5% over the same period, meaning investors can hedge against the erosion of their spending power. Another way of looking at it is that income investing can be growth investing in disguise.

Events over recent years have seen share prices fluctuate considerably but dividends have been more stable. It is easy to think that with low economic growth in the West this means that dividends must have suffered too. Clearly there are times when companies have no choice but to cut their dividends to protect their balance sheets – the credit crunch in 2008/9 was a good example but it is exceptional. Since then, companies have concentrated on restoring their financial positions and today businesses have higher than usual levels of ‘spare’ cash on their balance sheets, giving management the means to return cash to shareholders, either by increasing dividends or via a one-off special dividend. The other aspect of equity income investing is that high-quality companies have robust business models and investors’ conviction in these businesses means their shares tend to be less volatile than others over a full market cycle. So, whilst they may not have the racy characteristics of a growth stock in a rising market, they are likely to weather difficult or turbulent market conditions much better.

HEAT HELPS FOOD, HARMS CLOTHES

UK retail sales values were 0.3% higher on a like-for-like basis from September 2010, when sales had risen 0.5%. On a total basis, sales were up 2.5%, against a 2.2% increase in September 2010.

Food sales growth was similar to that in July and August. Non-food sales improved a little but remained challenging. Homewares showed a modest uplift, though sales were still often deal-driven. Larger purchases in particular were hit by fragile consumer confidence and the weak housing market. Clothing sales dropped off sharply in the end-of-month heatwave. Non-food non-store (internet, mail-order and phone) sales growth fell back after picking up in August. Sales were 10.1% up on a year ago, down from 12.6% in August and well below the 19.1% in September 2010.

Stephen Robertson, Director General, British Retail Consortium, said: “In these harsh times, we have to be thankful for this minor improvement in growth compared with August but underlying conditions remain weak. Spending growth is below inflation meaning customers are buying less than this time last year. And there’s no guarantee next month’s figure will be better. Total sales growth has been flipping between 1.5 and 2.5 per cent for four months now and year-to-date like-for-like growth is zero. Short-lived factors such as the weather and discounting are influencing sales not any fundamental change in how customers are feeling. Hot weather at the end of September boosted spending on food and drink, but clothing sales slumped as the sun undermined interest in winter ranges.  As we head into the year’s most important trading period, we need a return of optimism. That requires people to feel that next year they will see some payback for the current pain.”

Helen Dickinson, Head of Retail, KPMG, said: “While we were seeing reasonable growth during the first weeks of September, hopes for a major improvement on recent months were dashed as the exceptionally hot weather kicked in during the final week, when hitting the shops was well down our list of priorities.  The food sector proved again to be more resilient than other sectors although, with the new academic year starting, schoolwear and shoes also did well. Sales of home accessories, house textiles as well as toiletries and cosmetics showed signs of improvement. However, with consumers’ incomes being squeezed from all sides, many shoppers continue to steer clear of big-ticket items.  As we are entering the crucial season in the run-up to Christmas the outlook may be described as “hopeful” but that’s as good as it gets I am afraid.”

SHOP PRICE INFLATION STEADY Overall shop price inflation remained at 2.7% in September. Food inflation was unchanged at 5.0% in September . Non-food inflation fell to 1.3% in September from 1.4% in August.

Stephen Robertson, British Retail Consortium Director General, said: “The pressures on prices from world commodities, import inflation and January’s VAT rise haven’t gone away but they haven’t worsened either. Shop price inflation is stable and well below the Consumer Price Index, the Government’s official measure of inflation. The Bank of England expects CPI to go on rising but that’s due to things like utilities, petrol and insurance not shop prices. In fact some goods – clothing and electricals – continue to be cheaper than a year ago as retailers discount aggressively to produce sales and stay in business. Fundamental conditions are unlikely to change much this side of Christmas but next month we’ll see what effect the supermarket price war – based on straight price cuts rather than other forms of promotion – is having on food inflation.”

Mike Watkins, Senior Manager, Retailer Services, Nielsen comments: “While food inflation continues to account for the majority of the upward pressure on shop prices, some of the intensity has now gone away. While food prices remain five per cent higher than a year ago, it certainly looks as if the peak of 2011 will be a lot lower that than the high of over eight per cent that we saw at the start of the economic downturn three years ago. And shoppers continue to get further savings from promotions and price discounts at the checkout, which in turn is bringing down the cost of the shopping trip.”

EUROZONE CRISIS AND THE OUTLOOK FOR ECONOMIC GROWTH

Investors were subjected to another severe bout of volatility in global financial markets last week as worries resurfaced once more over the eurozone crisis and the outlook for economic growth. In Europe, frustration continued to grow over the lack of co-ordinated and firm action by policymakers to deal with the debt crisis and specifically Greece. Reassuring noises emanated from Athens mid-week along the lines that further cuts would be forthcoming which would be sufficient to satisfy the ECB et al and thus secure the next €8bn tranche of emergency funding. The cost was high – another 20,000 public service job cuts in addition to the 80,000 already agreed – so it was little wonder that there were further demonstrations in Athens over the swingeing impact of the latest austerity cuts. Investors briefly enjoyed a respite as markets rallied but were again stopped in their tracks on news that, unexpectedly, Standard & Poor’s downgraded Italy’s credit rating to ‘A’, five notches below the top-ranking AAA grade. The rating agency cited concerns over the Italian government’s resolve to implement the necessary budget cuts already promised – the yield on Italian (and Spanish) bonds rose ever closer to the pivotal 6% level which are seen by the market as unsustainable in the long term.

With investors’ nerves already taut, they were further unsettled by news – albeit anticipated – that the US Federal Reserve was to embark on a new form of quantitative easing (QE) in the form of ‘Operation Twist’. The policy involves the Fed selling $400bn of short-dated government bonds it owns to buy debt with longer maturities in an attempt to drive down further long-dated bond yields. The ten-year benchmark US Treasury bond already yields less than 2% but the intention is to make borrowing cheaper for longer, hopefully encouraging consumers and businesses to spend and thus stimulate growth. But it was Fed chairman Ben Bernanke who spooked the markets when he talked of significant downside risks to the US economy – this was interpreted by investors as impending recession for the world’s largest economy with all the ramifications for global growth. In response, global stock markets fell sharply with most major indices falling 5% on Thursday as investors headed for the safer havens of US, UK and German government bonds. Even gold appeared to have lost its lustre, falling over a $100 per troy ounce on the week. The potentially good news was that the price of oil and other commodities fell which ultimately will reduce inflationary pressures.

Double-Dip?

So what has changed for the markets to be worried, once more, that the West is about to slip back into recession? Just a few months ago there was growing optimism that developed economies would enjoy near trend growth and that the global economy would enjoy growth in GDP of around 4%-5% this year. The Japanese earthquake clearly impacted on global supply chains but is not in itself the single reason. It is now clear, according to some economists, that the effects of earlier policy stimulus introduced in response to the Lehman crisis are now wearing off and in some cases the stimulus is being reversed by those countries that have embarked on austerity cuts. Consumer balance sheets – unlike the corporate sector – are very stretched in the Anglo-Saxon countries and spending is falling as households pay down debt. Rising inflation is exacerbating the problem for consumers – an outcome of earlier stimulus policies which created the ‘wrong’ kind of inflation i.e. sharply higher commodity prices. The banks remain weak, despite some recapitalisation, especially in Europe and are reluctant to lend. Finally, the eurozone sovereign debt imbroglio has deteriorated into a crisis as a result of political paralysis and has severely damaged confidence.

Last week there was some evidence that the combination of these factors is threatening growth. The September Market Purchasing Managers’ index gave the strongest sign yet that the eurozone’s economy is sliding back into recession. The headline index fell from 50.7 to 49.2 – any number below 50 implies economic contraction. The survey suggested that Europe’s services sector is performing particularly badly and that the slowdown has extended to the largest economies of France and Germany. The International Monetary Fund (IMF) also warned about the threat to the global recovery last week as it downgraded its forecast for world growth from around 5% to nearer 4%, with the largest contribution coming from the developing world. The IMF said escalating risks to world recovery mean the US and other major economies should not sharply tighten short-term fiscal policy. This means economies like the UK have to negotiate a fine line between retaining market confidence by continuing to stick its deficit cutting plan and also stimulating growth. Economists along with industry leaders are urging action by the Chancellor to help the economy. Some ideas are new like reducing the banks’ capital cushion for loans to small businesses. Another is for the Bank of England (BoE) to inject finance directly into small company balance sheets by investing in securitised bundles of loans to such businesses. In response, Mr Osborne has promised concerted help which will be announced in his autumn statement.

The Fed’s decision to intervene via ‘Operation Twist’ is likely to be followed by further intervention by our own BoE following the release of this month’s MPC minutes. The language has changed, with the BoE believing that the growth outlook has weakened to such an extent that inflationary risks are on the downside and that further stimulus (QE) would be needed. So would QE2 work here? In its quarterly report the Bank estimated that the first round of QE, which involved the purchase of £200bn of assets, mainly gilts, between March 2009 and January 2010 saw a peak effect on the level of real GDP of between 1.5%-2%. Hence expectations have risen that the BoE will launch a new round of QE in November. The greatest perceived risk to such a move would be the impact on sterling which would most likely fall – this would potentially lead to higher consumer price inflation as the price of imports would rise. Conversely, a fall in sterling would make our exports cheaper and so give manufacturers a potential boost which would likewise boost growth. Again there is a fine line to be trodden – if international investors take the view that the Bank is deliberately trying to inflate its way out of trouble via currency devaluation then sterling could get hurt. For now, the market is pricing in how much QE will be, rather then if it is going to happen.

Europe – Time is Running Out

The eurozone has six weeks to resolve, once and for all, its sovereign debt crisis before the global economy hits the danger zone, according to Chancellor George Osborne. He, along with other members of the G20 group, warned European leaders not to prevaricate further and that patience is running out in the international community. As discussed, Italy’s credit rating downgrade coupled with poor economic data has increased the pressure for a workable and lasting solution to the debt crisis to be found. And the numbers appear to just get larger – according to the IMF, Europe’s debt crisis has exposed the region’s banks to €300bn of potential losses. The organisation said certain European banks need to urgently bolster their capital buffers to protect themselves.

The sharp fall in share prices last week has achieved one thing – it appears to have galvanised policymakers in Europe into action. Over the weekend news began to emerge that a major initiative was being put together by eurozone leaders. They have pledged to pass legislation by mid-October to make their rescue fund, the European Financial Stability Facility (EFSF), more flexible and to maximise its impact to address the contagion within the region. Discussions appear to have revolved around several key components which in aggregate could work. The first step would be wide scale recapitalisation of European banks in France, Germany and beyond to allow them to absorb sovereign debt losses, regain access to funding markets and reverse the destructive contraction of credit currently sweeping the eurozone. This would be followed up by measures to leverage the EFSF using liquidity provided by the ECB to the tune of several trillion euros (the numbers range from anything between €2-€6 trillion) – enough to protect larger nations such as Italy and Spain. These two countries between them have almost €2.5 trillion of sovereign debt outstanding. Once in place, an orderly default by as much as 50% of the value of Greece’s sovereign debt would be sanctioned. The question for the markets now is whether policymakers have the resolve to deliver such a solution and, crucially, fast enough.

Emerging World Ahead

Whilst the outlook for growth in the developed economies is cloudy, few observers, including well-known fund managers such as Neil Woodford, seriously expect the US or UK to go back into recession. Rather, the very low growth that is likely will perhaps feel like a recession but will also mean interest rates are likely to remain at near-zero for a number of years. Some observers have drawn parallels with Japan’s lost decade, implying a similar outcome for some developed economies. The circumstances are, fortunately, different for the West today. In Japan, asset prices were grossly overvalued in the lead-up to their bubble bursting and their banking system was left to its own devices instead of being cleansed and recapitalised. Undeniably though the US, the eurozone and the UK will inevitably face a long slog back to prosperity. Fortunately, the other half of the world – the emerging or developing economies – does not have the same problem and therein lies the investment opportunity. Economists such as Roger Bootle, of Capital Economics, rightly point out that growth prospects in these dynamic economies are significant. Of course, many rely on commercial trade and exports but countries like China and India are looking to grow their own domestic economies which will be a source of new economic growth in itself.

Unlike the West, many developing economies have conducted their short-term macroeconomic management with competence. These countries have carved out for themselves an unprecedented degree of counter- cyclical freedom by building up foreign exchange reserve buffers and fiscal surpluses. It makes sense therefore for any long-term investment strategy to be positioned to capture the strong growth from Asia and the like. Recent stock market falls have been indiscriminate on a global basis, leaving the share prices of many high quality businesses trading on very low price multiples, giving investors the chance to capture good levels of dividend income and growth prospects at lower cost.

AUGUST RETAIL SALES SHOW SECTOR DIVIDE UK retail sales values were 0.6% lower on a like-for-like basis from August 2010, when sales had risen 1.0%. On a total basis, sales were up 1.5%, against a 2.8% increase in August 2010.

Food sales growth was similar to that in July. Non-food sales fell further below their year-earlier level, with footwear and homewares showing the largest declines, despite further promotions. Big-ticket purchases were still often deal-driven, hit by fragile consumer confidence and the weak housing market. Non-food non-store (internet, mail-order and phone) sales growth picked up to the best since April. Sales were 12.6% higher than a year ago, after a relatively weak 9.6% in July but 17.8% in August 2010.

Stephen Robertson, Director General, British Retail Consortium, said: “The retail sector’s performance for August has been essentially flat, particularly bearing in mind the increase in VAT which will be responsible for some of the growth in spending. It remains a tale of two halves. The food sector has proved more resilient but non-food retail showed a marked decrease in sales year-on-year. The spell of hot weather at the start of the month was a boost for some retailers but it failed to last long enough to make a big impact. People had bought summer fashions early during the Spring heatwave and were reluctant to spend again while families left the traditional back-to-school purchases until late in the month, possibly hoping to benefit from further promotions. The riots were not widespread or prolonged enough to have a significant impact on these UK-wide figures. Poor consumer confidence, high inflation and the on-going squeeze on personal finances remain the biggest threats to the retail sector. Sales of big-ticket items are very dependent on discounting and many retailers’ margins are being cut to the bone.”

Helen Dickinson, Head of Retail, KPMG, said: “The weaker sectors are really struggling. For non-food, the picture is disheartening with one of the worst monthly results of the year thus far – toiletries, cosmetics, and menswear the only sectors showing growth. The differential between food and non-food performance continues to grow with food sales in value terms remaining relatively resilient. Given that much, if not all, of the growth is inflation and a higher VAT rate versus last year, this isn’t particularly good news for retailers as they struggle to maintain their margins. Promotional activity remains high to drive footfall and interest which is a delicate balancing act for retailers to ensure the volume uplift compensates for the margin losses.”

ACTION NEEDED TO PREVENT SPENDING PARALYSIS

UK retail sales values were 0.6% higher on a like-for-like basis from July 2010, when sales had risen 0.5%. On a total basis, sales were up 2.5%, against a 2.6% increase in July 2010. Food sales growth picked up in July after a poor June. Clothing and footwear picked up after a tough June, helped by clearance sales. Homewares were mostly down on a year ago and often promotion-led. Consumer caution continued to hit big-ticket housing-related purchases. Non-food non-store (internet, mail-order and phone) sales growth slowed after June’s clearance-led uplift. Sales were 9.6% higher than a year ago, compared with 11.5% in June and 11.3% in July 2010.

Stephen Robertson, Director General, British Retail Consortium, said: “This is a modest improvement on recent months but overall conditions remain very difficult for retailers. When you take into consideration inflation and January’s increase in VAT, 2.5 per cent growth effectively means people are buying fewer goods. Food sales continue to outperform non-food with inflation helping to drive top-line growth. But shoppers were only tempted into stores by an unprecedented number of promotions which come at the expense of margins. Sales of non-food goods barely grew, though clearance events helped summer clothing in particular. Growing fears of a global economic slowdown and a sovereign debt crisis have sent shockwaves through financial markets. Policymakers in Europe and the US must act quickly to implement a coordinated and credible strategy to reduce public sector deficits while supporting growth. Business and consumer confidence needs to be restored quickly before spending paralysis sets in.”

Helen Dickinson, Head of Retail, KPMG, said: “July was a better month than June, seeing an improving trend for the food sector and an uplift for clothing when the good weather finally kicked in. However, retailers of big-ticket items continue to find the market conditions challenging, with customers still reluctant to make major spending commitments. With pay rises hard to come by, consumers continue to feel the squeeze of higher prices and an uncertain outlook. Retailers are hunkering down and managing stock tightly and none is particularly optimistic about the outlook, although many expect inflationary pressures to decrease in the latter part of the year.”

Food & Drink – Joanne Denney-Finch, Chief Executive, IGD, said: “July’s food and drink sales show some encouraging improvement, partly due to better weather towards the end of the month. The new wave of fuel-related promotions by supermarket retailers may have succeeded in bringing forward some purchasing. Our latest ShopperTrack research reveals 51% of people say they are checking the price of every single item they put in their shopping basket. A similar number of shoppers are comparing prices between products and between stores. Food retailers, together with manufacturers, are responding with new ways to help shoppers keep to a budget via coupons, meal deals and price campaigns.”

“This is good growth compared with the high street where non-food sales are barely growing at all but it’s well down on the double-digit results we’ve seen for non-store sales in most of the months since we began this measure in October 2008. Apart from March, when sales were reduced by this year’s later Easter, this is the weakest growth for non-store sales of non-food goods for almost two years. The long-term progress of online retailing means internet shopper numbers and how much they’re buying continue to increase but the squeeze on household budgets is causing that to slow as people cut back where they can.”

* VAT changes: from 17.5% to 15% on 1st Dec 2008; to 17.5% on 1st Jan 2010; to 20.0% on 4th Jan 2011.

FOOD INFLATION SLOWS

Overall shop price inflation slowed to 2.8% in July from 2.9% in June. Food inflation slowed to 5.2% in July from 5.7% in June. Non-food inflation was unchanged in July at 1.3%.

Stephen Robertson, British Retail Consortium Director General, said: “The fall in overall shop price inflation came almost entirely from food. Good crops of seasonal fresh fruit and vegetables boosting supplies and cheaper animal feed easing the pressure on meat prices were the prime reasons food inflation fell, offering some respite to squeezed household budgets. Customers have adapted their shopping habits to higher levels of inflation over the last few months. People are increasingly taking advantage of promotions to help mitigate against the full impact of inflation, so the effect of food inflation faced by consumers will be less than 5.2%. Thirty-nine per cent of all the groceries being bought in supermarkets are now on offer. High world commodity costs and import inflation resulting from rising prices in China are still the key factors behind shop price rises. Non-food inflation was virtually unchanged from June but is still remarkably low, especially since these figures include the effect of the VAT rise.”

Mike Watkins, Senior Manager, Retailer Services, Nielsen comments: “While food inflation moderated a little in July, we have seen sales volumes slow across both food and non-food retailing in recent weeks with shoppers still looking for savings to help pay for increases in other household bills such as transport and energy. Retailers have responded with a continuation of price cuts and promotions to stimulate demand at a time when many households are shopping differently to help manage household budgets. Looking ahead, we are optimistic that whilst prices will still be higher than last year, the rate of increase may start to slow later in the year.”

LONDON ECONOMY EXPERIENCING SLUGGISH RECOVERY

The second quarter of 2011 saw only a small improvement in conditions for the capital’s firms. This is according to the latest Quarterly Economic Survey, conducted by London Chamber of Commerce and Industry.

KEY FINDINGS

London’s businesses only saw marginal improvement in sales and orders in Quarter 2 2011, suggesting that the recovery remains sluggish. Firms continue to perform better in export markets than in the domestic market, but hopes of an export-led recovery are still premature. Cashflow for businesses in London improved in Quarter 2 but remains a problem, with 33 per cent of companies reporting a fall compared to only 23 per cent that saw a rise.

Despite these disappointing figures there has been a slight upturn in confidence, with 59 per cent of firms expecting their turnover to increase over the next 12 months (up three points on Quarter 1) and 48 per cent expecting their profitability to increase (up four points on Quarter 1).

There were significant increases in the number of firms that tried to recruit for full-time and permanent positions: 46 per cent of London businesses tried to recruit in Quarter 2, which is the highest this figure has been since Quarter 4 2007.  However, of London’s smallest companies (1-19 employees) only 30 per cent tried to recruit, 16 points below the average.