dhl / bcc trade confidence index q3 2011

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The DHL / British Chambers of Commerce

TRADE CONFIDENCE INDEX

3RD QUARTER 2011


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CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Key Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Firm Size Breakdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Documentation Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

In Focus - Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . 9

THE BRITISH CHAMBERS OFCOMMERCE

The British Chambers o Commerceis the national body or a poweruland infuential Network o AccreditedChambers o Commerce across the UK,a Network that directly serves not onlyits member businesses, but the widerbusiness community. Representing92,000 businesses who together employmore than 4.8 million employees, theBritish Chambers o Commerce is The

Ultimate Business Network. EveryChamber sits at the very heart o its localcommunity working with businessesto grow and develop by sharingopportunities, knowledge and know-how. No other organisation makes sucha dierence to business as the BritishChambers o Commerce.

For more inormation visit:

www.britishchambers.org.uk

DHL THE LOGISTICS COMPANY FORTHE WORLD

DHL is the global market leader in thelogistics industry and The Logisticscompany or the world. DHL commits itsexpertise in international express, air andocean reight, road and rail transportation,contract logistics and internationalmail services to its customers. A globalnetwork composed o more than 220countries and territories and about275,000 employees worldwide oers

customers superior service quality andlocal knowledge to satisy their supplychain requirements. DHL accepts itssocial responsibility by supporting climateprotection, disaster management andeducation.

DHL is part o Deutsche Post DHL. TheGroup generated revenue o more than 51billion euros in 2010.

For more inormation visit:

www.dp-dhl.com


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FOREWORD

The third quarter o 2011 laid bare the issues that still need to beaddressed in order to truly build a sustainable recovery. Persistenteconomic problems in the United States and the Eurozone contributedto a sense that policymakers had still not got to grips with the hangoverrom the credit crunch. As a result, the wheels o the global economyhave been turning that bit slower, impacting upon the UKs exportingcommunity.

The results o the DHL/BCC Q3 2011 Trade Condence Index indicatethat order books have weakened, condence in increasing turnoverhas sotened and exporters desire to expand workorces is muted.Nevertheless, the positive message is that the results do still indicate

export growth, albeit at a slower pace than earlier in 2011.

The results are released just a ew weeks beore the Chancellor gives hisAutumn Statement. This is the perect opportunity to send the messagethat Government policy will match its rhetoric on helping exporters. Thiscan be achieved by restoring the UK Trade and Investment budget to

2010/11 levels in 2012/13, supporting SME trade show attendance and making the Overseas MarketIntroduction Service ree in 2012/13. So as not to undermine the decit reduction plan, this can bepaid or by a re-allocation o resources within the existing spending envelope.

The results o the second DHL/BCC 2011 Trade Condence Indexhighlight that exporters in the UK have been hit hard by international anddomestic headwinds.

UK businesses are operating in a muted market where infation hassurged to above 5%, putting urther pressure on consumers tighteningbudgets. Elsewhere in the Eurozone, condence in the sustainability ooreign debts and prevention o the nancial crisis spreading to largereconomies is still uelling uncertainty.

However, despite this restrained setting, the DHL/BCC Trade CondenceIndex shows there are clearly still opportunities or British businesses

to expand into overseas markets. Although overall orders have slightlyweakened and businesses condence has lessened, export guresshow that activity was at its third highest level on record in Q3 2011, aundamentally positive indicator.

We cannot underestimate the challenges ahead or exporters,particularly in the ace o the serious problems acing the Eurozone, which remains a major tradingpartner or small businesses in the UK. Developing an exporting plan takes time: market research,nancing, cultural understanding and local insight are just some o the aspects which need to beconsidered; which is why those businesses looking to expand globally require essential support.

Steps must be taken to support exporters, particularly SMEs, who are less able to ride the trends othe economic cycle than their larger counterparts. The government has already pledged to help thiscommunity with new export nance products, targeted support, and an enhanced role or British

embassies to promote trade, but we all need to help.

Now is the time or businesses to expand intointernational markets. With our collectivesupport we can help SMEs exploit the globalopportunities open to them, and in turnrebalance the countrys economy.

Phil Couchman

CEO

DHL Express UK & Ireland

John Longworth

Director General

British Chambers ofCommerce


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INTRODUCTION METHODOLOGY

The DHL/BCC Trade Condence Index(TCI) is a measure of the UKs exportinghealth. By analysing trends in trading

activity and key factors of exportingrms performance, the TCI gives atruly comprehensive picture of the UKsinternationally trading business community.The index casts new light on exporterslevels of condence and employmentintentions, and paints a picture of regionalexporting performance.

Those wishing to obtain more informationon the indexs methodology and datasources are invited to contact the British

Chambers of Commerce.

The TCI generates its results rom two datasources:

Questionnaire responses submitted by 1,022exporters, derived rom the BCCs QuarterlyEconomic Survey (QES). The QES is thelargest most representative business survey oits kind.

Data generated rom exporting activitythat requires supporting documentation.

THE SURVEY

Fieldwork or the survey was conductedbetween 29 August and 21 September 2011.Results are split into the ollowing rm size

categories:

0-9 employees (micro rms)

10-49 employees (small rms)

50-249 employees (medium rms)

250+ employees (large rms)

Unless otherwise stated, results reer to allexporters responding to the survey. Whereresults are split between the service andmanuacturing sectors, this is stated clearly inthe text. Results that are not split by rm sizeare weighted by the contribution o rm sizeto total exporting turnover.

Results are represented by either a balancegure or a pure percentage gure. Balancegures are determined by subtracting thepercentage o companies reporting decreasesin a actor rom the percentage o companiesreporting increases. Where a balance gureis positive it represents growth; where it isnegative, it represents contraction.

EXPORT DOCUMENTATION DATA

Many types o exports require supportingand commercial documentation to ensurethe timely delivery o goods and timelypayment. Chambers o Commerce administerthis documentation, and have amassed asignicant dataset around UK goods exportsas a result.

The TCI uses data collected rom this processto show both an index o documentation andregional comparisons o exporting activity.

Written and researched by:

Steve Hughes, Economic Adviser

Acknowledgements:

Sarah Jarvis, design and layout

The British Chambers of Commerce

65 Petty FranceSt. Jamess ParkLondonSW1H 9EUTel: 020 7654 5800Fax: 020 7654 5819Email: [email protected]



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EXECUTIVE SUMMARY Q3 2011

The third quarter o 2011 saw increased risks acing the global economy. Problems in the eurozoneescalated, as no convincing plan emerged to deal with the debt crisis, and weak data rom the USincreased ears about the strength o economic recovery. As a result, the three months to Octobersaw the US credit rating downgraded, President Obama launching a job creation scheme and BenBernanke, the Chairman o the Federal Reserve, outlining the so-called Operation Twist as a newstimulus measure.

Stark reminders that the all-out rom the credit crunch is nowhere near a conclusion were

extremely visible in Q3, as both the Chancellor o the Exchequer and Prime Minister openly toldthe eurozone economies get their house in order, and skirmishes broke out about UK nancialsector reorm ollowing the nal report rom the Independent Commission on Banking.

These kinds o headlines translate to the real economy, and the Q3 DHL/BCC Trade CondenceIndex shows that the economic outlook is more uncertain, aecting order books and attitudesto recruitment along the way. Figure One exemplies this, showing that condence in increasingturnover has dropped below 40 or the rst time since Q3 2010. In addition, high costs are stillsqueezing exporters, but there are some signs that these may be easing, which should provide alittle comort or the embattled business community.

Nevertheless, the results do point towards export growth, which is a undamentally positiveindication. That is not to say that Government cannot do anything urther. The Chancellor has his

Autumn Statement approaching, and this can be used or:

Weaker economic outlook impacts on order books and exporters desire to increase the

size of their workforce.

There are tentative signs that inationary pressures are easing, with capacity utilisationdropping, and the cost of raw materials less of a concern. Despite this, pressures to raise

prices are still strong.

Committing to restoring UK Trade and Investments budget to 2010 levels in nancial

year 2012/13, by reallocating spending within the existing Government envelope.

Supporting SME trade show attendance by matching the worlds best support schemes.

Making the Overseas Marketing Introduction Service reports (and other charged for UKTI

service) free for SMEs through 2012/13.

-40

-30

-20

-10

0

10

20

30

40

5060

Q3 11Q2 11Q1 11Q4 10Q3 10Q2 10Q1 10Q4 09Q3 09Q2 09Q1 09Q4 08Q3 08Q2 08Q1 08Q4 07Q3 07

Figure One: Condence in improving turnover in the next 12 months

%B

alance

Recession


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KEY INDICATORS Q3 2011

DOMESTIC, EXPORT AND EMPLOYMENT

Results in three key areas domestic markets, export markets, and employment indicate growth.However, the pace o growth has slowed since Q2, providing a warning that the encouragingexport activity witnessed throughout 2010 may be running out o steam.

Figure Two shows that the proportion o rms reporting a decrease in export orders has increasedto 24% in Q3 2011, the highest level since Q4 2009. This is up rom 22% in the Q2 2011, and up rom

12% in the rst quarter o the year. The proportion o rms stating that their export orders hadincreased was at its joint lowest level since Q3 2009, at 35%.

Exporters order books weaken in Q3 2011, but results still point to growth.

However, weaker economic outlook dents workforce growth.

Expectations to raise prices fall for manufacturing, but grow for services rms.

Not one o the survey balance indicators or overseas, domestic and employment activity hasstrengthened on the quarter. The domestic sales balance ell rom +15% to +14%, with the domesticorders balance alling rom +14% to +9%. The export sales balance was unchanged rom Q2, andthe export orders balance ell rom +13% to +11%. The balance representing employment overthe last three months ell rom +15% to +7%, and the balance representing the expectations oexporters increasing their workorce balance ell rom +9% to +6%.

0

10

20

30

40

50

60


Figure Two: % of rms reporting a decrease in export orders

%

rms

Recession


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In other words, the entire deterioration in the results rom Q2 2011 to Q3 2011 is down to a shitrom the category o respondents that expected their workorce to remain the same to those thatexpected it to deteriorate.

PRICES

When both the services sector and manuacturing results are aggregated together, the balancerepresenting pressure to increase prices has increased on the quarter, rom +25% to +30%. Whenthe results are split, a dierent picture emerges. In the manuacturing sector, the prices balance ellrom +49% to +41%; in the services sector it increased rom +11% in Q2 to +25% in Q3 (although,the Q2 result was preceded by two consecutive quarters o balances above thirty). Figure Threeshows the relationship between the two sectors over time.

Breaking down the employment expectations balance into percentage gures gives an insight intoexporters perception o short term trading conditions:

25%o exporters expect to increase their workorce over the next three months, unchangedrom the last quarter

56% o exporters expected their workorce to remain the same over the next three months

19%o exporters expect to decrease their workorce over the next three months, the highestgure since the third quarter o 2010

-20-10

0

10

20

30

40

50

60

Manufacturing

Services


Figure Three: Balance of rms expecting to increase prices

%B

alance

Recession


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Figure Four shows the actors that exporters report are adding to pressure to raise prices. Rawmaterials costs still dominate or the manuacturing industry, with 81% o rms stating price

pressures arising. While this is a all rom the second quarter, this indicator has now been above80% or the last our quarters.

The proportion o rms responding to each price pressures actor ell or all our categories inthe manuacturing sector. By way o contrast, only the Finance Costs category saw a all in theservices sector, rom 15% to 13%. This is the lowest recorded result in the time series (since Q32007), and is the third quarter in a row that it has declined. It is dicult to establish what thismeans one interpretation may be that as demand slows, investment is deerred and nance isnot needed (hence making the cost o nance less o a problem); another interpretation could bethat credit conditions are steadily easing.

Another point worth noting is that the Other Overheads category is prominent or both sectors(and is the most pressing concern or services rms). These overheads could include many things,

but anecdotal evidence points clearly to the cost o utilities adding to pressure to rms cashfow.

0 20 40 60 80 100

Q3 11

Q2 11

Pay Settlements

Raw Materials

Finance Costs

Other Overheads

0 10 20 30 40 50 60

Q3 11

Q2 11

Pay Settlements

Raw Materials

Finance Costs

Other Overheads

Figure Four: Factors adding to pressure to raise prices

% MANUFACTURING % SERVICES


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FIRM SIZE BREAKDOWN Q3 2011

All rm sizes recorded weaker export orders results than export sales results, suggesting

a slowing of export growth towards the end of the year.

EXPORT SALES AND ORDERS

On both the export sales and export orders measures the smallest rms have recorded weakerabsolute balances than larger rms. Table One shows a comparison o the results quarter-on-quarteror the our dierent rm size categories. That there are no negatives in the Q3 sales or orders

balances, supports the expectation o exportgrowth. For every rm size category theorders balance is weaker in absolute termsthan the sales balance, suggesting a weakeroutlook or exports as the year reaches itsend.

Firms with a smaller number o employeeshave seen a much tighter range o resultsover the time series than larger rms have.Table Two shows the maximum and minimumresults returned over the history o the dataor each o the rm size categories.

Figure Five shows the dierence over timeo the relative perormances o the rmsemploying smaller numbers and thoseemploying larger numbers. Larger exportingrms appear to ride the trends o the economiccycle with greater amplitude than their smallercounterparts.

EXPORT SALES EXPORT ORDERS

EMPLOYEE

SIZE

2011 Q2 2011 Q3 2011 Q2 2011 Q3

0-9 +10% +9% +5% +3%

10-49 +18% +9% +14% 0%

50-249 +26% +17% +22% +9%

250+ +12% +20% +13% +18%

Table One: Export sales and orders by size of rm

EMPLOYEE SIZE MINIMUM

BALANCE

MAXIMUM

BALANCE

RANGE

0-9 -14% +9% 23 points

10-49 -23% +18% 41 points

50-249 -27% +31% 58 points

250+ -58% +58% 116 points

Table Two: Minimum, maximum and range of orders

balances by rm size

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

250+ Employees

0-9 Employees


Recession

%B

alance

Figure Five: Balance for export orders by rm size


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EXPORT DOCUMENTATION DATA Q3 2011

Documentation numbers rise both on the quarter and on the year, indicating increased

export activity.

All regions show improvement on at least one measure of documentation growth.

NATIONAL DOCUMENTATION VOLUMES

The level o export documentation in Q3 was 3.33% higher than in the same quarter a year earlier,and was 2.98% up on the second quarter o 2011. That documentation continued to grow supportsthe view that export growth continued in the third quarter o the year. Indeed, in absolute numbers,the volume o export documents was the third highest on record, behind Q1 2011 and Q3 2008.

THE REGIONAL PICTURE

Only the North West and Northern Ireland recorded declines in documentation numbers quarteron quarter. Nevertheless, the North West is still the third largest region when it comes to the totalnumber o returns, and Northern Ireland has the largest percentage increase in returns whencomparing the current quarter with a year earlier.

PERCENTAGE CHANGE

Index number 2007 = 100 Most recent quarter on ayear earlier

Most recent quarter onprevious quarter

Volume index of export

documentation 109.9 3.33% 2.98%

INDEX OF DOCUMENTATION

-10

-5

0

5

10

15

20

25

30

35Q3 11 on Q3 10 % Change

Qtr on Qtr % Change

N IrelandWalesN EastS WestEast MidsW MidsEasternY & HScotlandN WestS EastLondon

%C

hange

Figure Six: % change qtr-on-qtr and yr-on-yr

An explanation o documentation data can be ound in the report methodology.


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IN FOCUS: CAPACITY UTILISATION Q3 2011

Capacity utilisation drops for the second successive quarter as the outlook for growth

softens, a further indication of easing inationary pressures.

The extent to which total capacity is put into productive use by a business is very dicult tomeasure, but is nevertheless an incredibly important indicator or policymakers to analyse. It isparticularly relevant or the Bank o England, and others, trying to model the outlook or infation,and the subsequent setting o interest rates.

I capacity utilisation is high then it can create infationary pressures (i demand increased urtherthen higher costs could be incurred by generating extra capacity to produce more). This eectmay be dampened i the economic outlook suggests buoyant demand and rms invest on theexpectation o needing to increase output (this, however, is dependent on other actors as well,such as credit conditions).

Figure Seven shows the movements o the capacity utilisation result since the beginning o the

series. It also shows the percentage o rms reporting an increase in investment intentions or plantand machinery. As would be expected, capacity utilisation dropped during the recession, as did theoutlook or investment. Post-recession the results suggest that spare capacity slowly gets eaten up,as investment intentions began to rise.

Taking averages o three periods rom the time series (prerecession, recession, and post-recession) the indication is thatcapacity utilisation has not yet reached pre-recession levels. The

pre-recession average was 43%, during the recession it was 33%and post-recession it so ar stands at 37%.

0

10

20

30

40

50

% Full Capacity

Investment P&M


Recession

%Firms

Figure Seven: % of rms operating at full capacity and improving intentions to invest in plant and machinery


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BRITISH CHAMBERS OF COMMERCE

65 PETTY FRANCE

LONDON SW1H 9EU

UNITED KINGDOM

T +44 (0)20 7654 5800

F +44 (0)20 7654 5819

[email protected]


DHL INTERNATIONAL (UK) LTD

178-188 GREAT SOUTH WEST ROAD

HOUNSLOW

MIDDLESEX TW4 6JS

UNITED KINGDOM

T +44 (0)844 248 0844

www.dhlguide.co.uk

dhl / bcc trade confidence index q3 2011

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