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Inflation continues to weigh on London businesses as elections loom large

Tuesday 23 April 2024

Ahead of Mayoral and London Assembly elections, inflation continues to be the number one concern for London businesses according to the London Chamber of Commerce and Industry (LCCI), which has today published the results of its latest quarterly economic survey. The Capital 500, which seeks to gauge private sector performance and confidence levels among businesses of various sizes across the capital, found that despite an improved inflationary outlook, 60% of firms were more concerned about inflation in Q1 2024 than they were in Q4 2023. 

The latest survey, conducted by Savanta, showed that cashflow declined for the first time in a year, as business costs remained high. Only a quarter (24%) of firms said their cashflow had risen in Q1, down from 26% in Q3 2024, while two-thirds (67%) of firms saw an increase in their energy costs compared to Q4 2023. Against a backdrop of easing inflation and the expectation that interest rates will decline, just 6% of all London firms said their energy costs had fallen in Q1, demonstrating that there is little sign of a sustained reduction in the cost pressures weighing on businesses.

Indicating that businesses experienced a weak start to the year, export demand softened for the second consecutive quarter with just one in ten (10%) London businesses reporting that international sales had risen during Q1 2024. Similarly, businesses of all sizes reported a slowdown in domestic orders during the first three months of the year. For micro companies, the orders balance fell from +3 to -4 in Q1, while for larger firms the balance dropped to a one-year low (down 7 points to +18).

Despite a muted start to 2024, the survey reflected that businesses were upbeat about their own prospects for the remainder of the year. Likewise, expectations for both the London and wider UK economies showed marginal signs of improvement. Key findings include:

  • In the joint highest reading since 2021, the net balance for overall company prospects climbed for the second consecutive quarter in Q1 from +11 to +16. More than a third (35%) of companies expect their prospects to improve over the next 12 months, compared to 19% who anticipate a worsening.
  • There was a slight dip in the profitability expectations balance in Q1 with 46% of firms anticipating an increase in profitability over the coming 12 months, down from 50% in the last quarter.
  • Three in ten (30%) businesses expect that London’s economy will grow over the coming 12 months (up from 28% in Q4 2023), pushing the net balance into positive territory for the first time in two years.
  • The share of firms expecting the UK economy to improve in the next 12 months rose slightly from 26% in Q4 2023 to 28% in Q1, while there was a smaller proportion that expect the economy to worsen (37%, down from 41% in Q4).

The improvement in outlook can be attributed in part to the labour market which was stable in London for the first three months of the year. Recruitment activity increased again with 28% of London firms trying to make hires in Q1 – a new record for the Capital 500 – while the proportion of firms who said their workforce size had increased was 14%, up from 11% in Q4 2023. The increase in recruitment efforts was in part driven by micro businesses, with the share of micro firms looking to recruit increasing from 22% to 24% in Q1. By contrast, 70% of larger businesses tried to recruit last quarter, down slightly from 73% in Q4 2023.

Reacting to the findings of the report, Karim Fatehi MBE, Chief Executive of the London Chamber of Commerce and Industry (LCCI), said:

“The latest findings show that although there are fledgling signs of improvement in business sentiment and the labour market, London businesses continue to shoulder the weight of high operating costs. Although inherently resilient, the combination of dampened demand and significant cost burdens remains an impediment to growth. 

“2024 is a year of significant political importance for London businesses, with Mayoral and London Assembly elections in May and a General Election expected in the second half of the year. Chief among LCCI’s asks of the next Government is a long-term, strategic plan to improve operating conditions for businesses. Without this, business confidence and the UK’s ambitions to secure higher levels of productivity and economic growth will stagnate.”

Read the full report.

ENDS

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