This month we look at broader economic indicators and assess their impact on contractors, taking a straw poll of the surveys of the big hitters in business advice and information: KPMG, BDO, Baker Tilly and the Confederation of British Industry & PricewaterhouseCoopers. And whilst short-term opportunities may be looking up for contractors, the potential longer-term story does not make pleasant reading. We also make our usual visit to the Monster Employment Index, to see what’s in store for contractors.
In this month’s ContractorCalculator Market Report:
- The Monster Employment Index falls for the second consecutive month, with declines in IT and engineering
- Business confidence in the UK is at the highest levels for 18 months according to a KPMG survey
- The outlook for financial services is improving, but CBI/PricewaterhouseCoopers fear long-term damage
- UK business is at ‘the height of the business failure cycle’ says the autumn IndustryWatch report from BDO
- The Baker Tilly Financial Director survey highlights serious issues with late payments, as they double in the last six months.
Monster Employment Index
Demand for workers in the Engineering and IT sectors fell 3% and 6% respectively in the latest Monster Employment Index, continuing the decline for engineers and reversing the uplift in IT vacancies last month. Conversely, contractors in telecoms will be delighted by a 10% increase. Overall, the index fell by two points, the second consecutive monthly fall, and is down 33% year on year.
According to Hugo Sellert, head of economic research at Monster Worldwide: “Hiring among UK companies remains worryingly stagnant. As long as the macroeconomic outlook is uncertain, companies will remain reticent to hire workers, which in itself could slow the actual recovery.”
The delays in hiring workers are not all bad news for contractors, who traditionally step into the breach and find contracts in organisations when permanent recruitment is frozen. However, there are signs of a slow-down in public sector and defence recruitment, with both falling by 10%. That’s not good news for contractors who have struggled to find private sector contracts in deeply depressed industries, like finance and construction.
KPMG poll shows business confidence at highest levels for 18 months
In a poll of the UK’s senior executives, KPMG’s quarterly National Business Confidence Survey is showing that over half (56%) claim to have seen signs of the UK’s economic recovery. The number who view prospects for UK business as ‘good’ or ‘very good’ has doubled to 19% since the last survey.
This is tempered by fears of depressed sales of goods and services, as KPMG’s head of markets Malcolm Edge explains: “While at first glance these statistics do look encouraging, we must not forget that opinion is still heavily divided as to whether or not the economy is out of intensive care.
“It's particularly interesting,” he continues, “that in spite of certain economic indicators pointing towards modest growth in the third and fourth quarters of this year, the majority of senior executives do not expect the economy to come out of recession for at least another seven to 12 months; perhaps because there is, as yet, no end in sight to falling consumer demand.”
Continuing recession is a double-edged sword for contractors, as whilst contractors are an attractive low-risk option for organisations to manage capacity issues when facing an uncertain future, overall demand for contractors has shrunk with the economy.
‘Long term damage’ slows fragile financial services recovery
Positive sentiment in the financial services sector – one of the largest consumers of IT contractors – is at its highest levels since 2004. So says the latest quarterly CBI/PricewaterhouseCoopers Financial services survey, which also confirms that the financial crisis is unlikely to worsen.
However, the report goes on to say that ‘the outlook may be improving, but the crisis is still seen as having caused long-term damage’ and there ‘is no real expectation that the UK financial services industry will return to the buoyant position it occupied three or four years ago.’
Alarmingly for contractors, the report says that cost control is a key priority in most firms and headcount is falling across most of the sector. The banks were one of the first sectors to impose swingeing rate cuts on contractors when the credit crunch started and it appears possible that financial services may never suck in the huge numbers of IT contractors it once did.
Increased regulation is cited as a serious threat to recovery and eventual returns to healthy levels of profitability, but contractors may benefit from the resulting bubble that will arise from the banks rushing to get compliance and governance systems into place before new regulations come into force.
‘UK at the height of the business failure cycle’ and unemployment to mushroom
According to BDO’s autumn IndustryWatch report, although all sectors of the economy show some positive signs of improvement, 33,000 businesses are forecast to fail in 2009, unemployment will soar to 3.4 million and consumer spending will decline by 3.4% this year.
Whilst these figures represent no immediate specific threat to contractors, some of the 33,000 business predicted to fail may close owing contractors money, and the poor health of the UK’s economy will affect contractor demand. Also, as mass unemployment rises, so will the pool of first timers trying contracting as an alternative to the shaky ‘assurance’ of employment.
BDO also warns that higher business taxes are in the offing, as government seeks to offset its £175bn-plus borrowings in 2009, so limited company contractors could find their corporation tax bills beginning to rise.
Late payment doubles in six months
Baker Tilly’s latest twice-yearly Finance Director Survey reveals that late payment has doubled in the last six months, with a whopping 41% of those FDs surveyed reporting problems with late payment.
Increasingly, businesses are having to fund their working capital through stretching credit terms with their suppliers, as they can't rely on invoices being paid on time
Mark Harwood, Baker Tilly
By using their suppliers as informal bank facilities, some large organisations may be driving smaller businesses to the wall, as Baker Tilly Head of Governance and Risk Management Mark Harwood warns: “Increasingly, businesses are having to fund their working capital through stretching credit terms with their suppliers, as they can’t rely on invoices being paid on time.
“This creates a chain reaction throughout the economy,” continues Harwood. “However, the stark reality is that elastic can only be stretched so far before it snaps, and we will see more companies go bust as pressure on working capital increases.”
The Baker Tilly survey also reports that 43% of FDs feel that government support for business in response to the financial crisis has been lacking, and that the situation is not likely to improve. Rob Donaldson, Partner and Head of M&A and Private Equity, explains: “Despite some positive signs of a slow recovery, times will remain tough for business over the next year.”
There is a range of measures that contractors can employ to reduce their exposure to late payment and to ensure they are paid what’s owed to them, and it seems likely that contractors will be increasingly required to implement these measures to ensure they don’t become another recession statistic.