New research shows that the economic balance of the eurozone is undergoing significant change as German business confidence took a sharp nosedive in the last quarter, threatening to drag the world’s biggest trading block downwards. In contrast, UK business leaders remained highly optimistic over the UK’s economic prospects during the past three months.

According to Grant Thornton’s International Business Report (IBR) – a global quarterly survey – the changes across the eurozone uncover a “see-saw effect”, with prospects for growth rising in the economies of Spain, Ireland and Greece just as Germany’s and France’s fall – posing fundamental questions about whether the eurozone can accommodate the varying fortunes and trajectories of its members.

The IBR reveals that in the last three months optimism across the eurozone fell from net 35% to just 5%. In Germany, business optimism plummeted from a net 79% to just 36% over the period, with the proportion of firms citing a lack of demand as a constraint on growth jumping from 6% to almost one in four. In France, the bloc’s second largest economy, business optimism dropped by 28% from the previous quarter.

In the UK, confidence remained markedly buoyant over the period, reaching 82% – just 1% below the all-time high reached in the first quarter of the year and a 35% year-on-year increase. This places the UK in second place in the business optimism index, behind India (95%). British businesses were also the most upbeat over future demand for their products and services, with only 14% of businesses citing a shortage of orders or reduced demand as a major concern.

At the same time, the outlook in some of the eurozone countries who suffered the most during the crisis is now actually improving. Business expectations for increased revenue in the next 12 months are up in Greece (50% to 70%) and Ireland (58% to 70%) while a growing number of firms in Greece, Ireland and Spain also expect higher profits. Greek and Spanish businesses are also much more bullish about employment over the coming months, a welcome change despite overall unemployment levels remaining high.

A slight reduction in UK export expectations – to 28% over the period, versus the record high of 34% seen in the previous quarter – suggests demand is largely domestically focussed, as uncertainty remains in more traditional exports markets; reinforcing the need for greater government support in this area. Access to finance also remains a concern for some (14%) UK businesses and concerns over a lack of skilled workforce persist, reaching a record 28% in the third quarter.

Carl Williams, North West Managing Partner of Grant Thornton UK LLP commented:

“As one of the lynchpins of the eurozone economy, the drop in business confidence in Germany is clearly a concern across the trading bloc – particularly when it’s coupled with shrinking order books and a weak outlook on jobs in the country. The UK’s economy is still heavily dependent on trade with eurozone countries, so despite a stronger domestic outlook, contraction across the trading block could adversely impact the UK’s prospects. Avoiding this dependence on the eurozone requires more support, such as building on the efforts of UKTI to help our mid-sized business (MSB) community open new trade opportunities further afield – particularly in faster growing developing economies where ‘brand Britain’ carries a premium.

“Moreover, for the UK to really capitalise on current momentum and cultivate a business environment that’s fit for the long-term, a lot more work will need to be done – particularly by the Government. Policymakers now hold the key to unlocking substantial growth potential, by addressing our current skills shortage through financial and tax incentives for MSBs to take on and train even more apprentices, and introducing initiatives to ease the financing shortfall, such as reintroducing the corporate venturing scheme. In turn, these boosts to UK MSBs would translate into increases in jobs, income, quality of living and other signals of a healthy, diversified and sustainable economy.”

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