New job creation could be squeezed by spare capacity

New jobs may be at a premium during the early stages of the recovery as the majority of firms are still running below capacity.
 
That was the finding of a new report from the Institute of Chartered Accountants in England and Wales (ICAEW).
 
The ICAEW’s latest business confidence monitor found that only 36 per cent of firms are operating at full capacity. That means that two-thirds of businesses can boost output without having to take on new staff.
 
In the first quarter of 2008, almost a half of firms (48 per cent) were at full capacity before the recession bit.
 
The ICAEW predicts that the level of spare capacity in the economy will have the effect of dampening inflationary pressures in the longer term.
 
According to the report, business confidence rose for the fourth consecutive quarter, up to +25.8 from the +24.6 recorded in the final three months of 2009.
 
More than a half of senior business professionals (59 per cent) expressed an
increase in confidence over future prospects during the next 12 months,
while only 14 per cent of businesses are less optimistic.
 
While improving, access to business capital remains a serious problem for
firms. A quarter of respondents to the survey reported that securing finance
was more of a challenge than a year ago; in the first quarter of 2009, the
proportion was 35 per cent.
 
Customer demand appears to be rallying too. A year ago, 54 per cent of firms
said it was a threat to performance; now that proportion is down to 46 per
cent.
 
Cashflow problems are also being allayed. The peak in late payments from
customers was registered in the second quarter of 2009, when 43 per cent of
respondents said that overdue bills were a problem; now it has fallen to a
third.
 
Looking ahead, the survey revealed that firms believe that workforce numbers will grow by 0.9 per cent and that salaries will rise by an average of 1.4 per cent.
 
Michael Izza, the ICAEW’s chief executive, commented: “The business
confidence monitor suggests firms are managing at the moment with fewer
staff. That, coupled with the capacity that exists within the UK economy,
suggests that expected improvements in economic performance won’t
necessarily lead to significant job creation. The sustainable business of
the future will look more carefully at managing human capital to help build
long-term growth.’
 
Mr Izza added: “The UK economic recovery is still very fragile and needs
careful nurturing. There are still many threats on the horizon which
suggests conditions in the wider economy may make for a bumpy ride. In 2009, the focus for business leaders was on protecting their companies from the
worst effects of the downturn. In 2010, they now need to concentrate on
creating demand and driving orders to ensure their businesses return to full
capacity.”