London firms resilient and optimistic amid ongoing energy cost pressures

Karim Fatehi MBE, Chief Executive of the London Chamber of Commerce and Industry (LCCI), says new research has revealed that businesses have a “heightened sense of optimism” about the future but stresses the urgent need for the Government to provide long-term stability.

It’s encouraging to see businesses expressing a heightened sense of optimism about their future prospects and the overall economy, reflecting a more positive outlook than we have seen in recent years. Nevertheless, as we approach the impending Budget, the latest findings from the Q3 Capital 500 highlight an urgent need for the Government to provide reassurance to the business community through the long-term stability essential for sustained growth.

London businesses experienced a significant increase in optimism about the state of the economy and sales in Q3 2024, according to the Capital 500, London’s quarterly economic survey (QES) conducted by the London Chamber of Commerce and Industry (LCCI).

Four in 10 businesses (39 per cent) now anticipate economic growth in the capital over the next 12 months, up from 35 per cent who said the same in the Q2 QES. Domestic demand for London businesses also showed encouraging growth in Q3, with the percentage of firms that reported an increase in demand (compared to those reporting a decrease) climbing from +2 to +6 in Q3 2024.

Following this positive trend, labour market figures for London businesses continued to improve, with 13 per cent of London businesses reporting an increase in their workforce size since last quarter, one of the highest levels since 2021. Firms also expressed greater optimism about future workforce growth, with 26 per cent expecting their workforce to increase in size over the next quarter, up from 23 per cent who reported the same in Q2.

Business cost pressures eased during Q3 2023, although most businesses still said their fuel, energy, raw material and wage costs continued to increase. Just over half (52 per cent) of companies reported their energy costs had risen in Q3, down from 58 per cent in Q2, marking the lowest share reporting an increase from quarter to quarter since Q3 2021, before the energy price shock.

Just under one in 10 (8 per cent) of London firms said their energy costs had fallen over the previous three months in Q3, the biggest proportion since Q1 2021, although this remains a relatively small number.

Finally, confidence in business operations remained high in Q3 2024, despite a small decline in some of the QES indicators. The net balance for profitability dipped seven points to +30 last quarter, with 47 per cent of firms expecting their profitability to increase in the coming 12 months, down from 52 per cent in the Q2 QES. There was a slight increase in the percentage of businesses that said they expect profitability to worsen (17 per cent in Q3, 15 per cent in Q2).

Optimism and expectations about profitability and turnover were split based on business size; larger companies (250+ employees) were more optimistic on profitability (64 per cent expected an increase in the next quarter) compared with micro businesses (0-9 employees), where the figure was 45 per cent in Q3.

Other key findings include:

• 26 per cent of London businesses reported an increase of domestic sales last quarter, with 22 per cent seeing an increase in domestic orders.

• 10 per cent of London businesses reported an increase in export sales last quarter, with the same amount (10 per cent) seeing an increase in export orders.

• London businesses pointed to a pick-up in labour market activity during the third quarter of 2024.

The employment balance – which measures reported workforce levels in the past three months – rose two points to -1 in Q3, the highest level since Q2 2022.

• 29 per cent of firms in the capital reported an increase in cashflow last quarter, with 18 per cent of firms reporting an increase in investment in plant and equipment.

On the findings of the report, LCCI CEO Karim Fatehi MBE said: “It’s encouraging to see businesses expressing a heightened sense of optimism about their future prospects and the overall economy, reflecting a more positive outlook than we have seen in recent years. Nevertheless, as we approach the impending Budget, the latest findings from the Q3 Capital 500 highlight an urgent need for the Government to provide reassurance to the business community through the long-term stability essential for sustained growth.

“The upcoming Budget represents a pivotal moment for the UK. It offers politicians the chance to redefine the economic narrative and introduce policies which will secure long-term growth and prosperity for the UK.

“All eyes will be on the Chancellor at the end of this month as businesses call for reforms to the business rates system, better skills and immigration policies and strengthened relationships with key international trading partners. By listening to businesses and addressing these key policy issues, the Government will foster an environment of confidence which will drive investment and innovation throughout London and the rest of the UK.”