The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 17 October to 15 December 2023. 

1. Business sentiment has failed to pick up in recent quarters and remains below its historic average. However, within the quarter weekly data shows confidence improving after a fragile start.
2. Sentiment is partially restrained because selling price inflation and profits growth have fallen. Meanwhile, input cost rises have slowed once more, and salary growth appears to have peaked. Companies anticipate both to moderate further in the year ahead while employment growth is set to remain at current rates.
3. Domestic and export sales growth continued to soften, reflecting weaker demand, but companies forecast an uptick. The underlying weakness of the economy, coupled with various uncertainties and challenges, has affected all sectors. Sentiment is neither strongly positive nor negative in any sector.
4. Customer demand is the one of the two most widespread growing challenges facing businesses, together with regulatory requirements, which primarily is the most pressing issue for the Banking sector. In addition to these two challenges, finance-related issues, including the tax burden, bank charges, late payments and access to capital, remain pressing concerns. 
5. Sentiment remains positive in most regions and nations, but confidence in Yorkshire & Humber slipped into negative territory and companies in Wales are the most downbeat.
6. Privately owned companies forecast slightly stronger domestic and export sales growth and higher profits growth than listed companies. Some manufacturing-intensive regions are the most confident, while the South West and East of England have edged into positive territory.   

• Mixed economic news as weak economic activity persisted but inflation eased considerably. The rate of wage rises slowed somewhat but remained high while the labour market was flat. Business insolvencies increased sharply.
• The Monetary Policy Committee (MPC) kept interest rates fixed at 5.25% throughout Q4.
• The Autumn Statement included several measures to support businesses and households, including a reduction in National Insurance Contributions and measures to boost business investment and increase labour market participation.
• Prospects for growth in the UK and globally are expected to be weak in 2024, particularly in the first half of the year, and there are a number of risks to the outlook.

The survey period, running from mid-October to mid-December, saw mixed news regarding the economy. GDP figures showed that UK economic activity remained essentially flat, with a small decline of 0.1% recorded for Q3 2023 (July to September) and monthly data showing GDP contracted by 0.3% in October. The most recent monthly estimate shows GDP growth of 0.3% in November. It therefore seems likely that GDP growth for Q4 was around zero, which would mean that the UK economy grew by just 0.4% in 2023.

Other economic data showed that the labour market has also been flat, with ONS estimates of unemployment, employment and inactivity showing little change in the three-month period to October. However, monthly business insolvency data for England and Wales showed an 18% rise in the year to October 2023, or 2,315 registered company insolvencies, suggesting that a combination of weak demand and high interest rates may be putting more businesses under financial stress.

While economic activity has remained subdued, the rate of inflation continued to ease during the quarter. The Consumer Prices Index (CPI) fell from 6.7% in the year to September to 4.6% in October, which was a greater decline than expected. It was joined by evidence of easing pay growth, with the headline rate (three-month average of the annual rate) falling from 8% in September to 7.2% in October. However, while the rate of pay growth has slowed, it is still around twice the pace required to meet the Bank of England’s 2% inflation target. Largely as a result, the Monetary Policy Committee (MPC) maintained interest rates at 5.25% throughout the final quarter of 2023.

In November’s Autumn Statement, the Chancellor announced a cut in the rate of employee National Insurance Contributions (NICs), a permanent 100% capital allowance for qualifying business investment, and various schemes designed to increase labour market participation. But in our view, the new measures only mitigate the effects of fiscal tightening announced earlier, and the lagged impact of higher interest rates will continue to emerge. As a result, we expect the UK to eke out modest GDP growth of 0.5% in 2024, with a slow start in H1 before gradually improving in H2.

Elsewhere, growth in the US has significantly slowed and we expect further moderations this year. The eurozone economy shrank in Q3 2023 in GDP terms, and a similar fall probably occurred in Q4 2023, implying a small recession. We expect a gradual recovery in 2024, with the economy set to be 0.6% larger this year compared to 2024. Data for China has been mixed, with the manufacturing PMI and private investments remaining in negative territory on a y/y basis. We forecast China’s GDP will expand by 4.4% in 2024, which is weak compared to its long-term average.

There are also significant risks to the UK and global outlooks. The Israel-Gaza war initially caused oil and gas price rises, and although these have since abated, uncertainty around energy prices has increased. And attacks on container ships in the Red Sea have again highlighted the fragility of international supply chains, which could also filter through to broader inflationary pressures.

Political uncertainty linked to a number of elections set to be held both in the UK, US and globally in 2024 is also clouding the economic outlook. Whilst the UK general election, widely anticipated for May or autumn, is unlikely to significantly change the course of macroeconomic policy, companies may delay investment and recruitment decisions. Meanwhile, there is the prospect that the chancellor may offer further concessions in his 6 March Budget.

• Business sentiment has failed to pick up in recent quarters, reflecting ongoing weakness in the economy and high interest rates. At +4.2, it remains below the 2010-2019 average of +7.2.
• Domestic sales growth eased once more and exports fell markedly, however, companies expect improvements over the coming 12 months.
• Business sentiment is neither strongly positive nor negative in any sector. IT & Communications is the most optimistic sector, and confidence in Property is now somewhat positive but sentiment in Business Services and Energy, Water & Mining has slipped into negative territory.
• Domestic sales growth in IT & Communications is strongest, and companies in the sector have the highest expectations for exports. All sectors expect some improvement in domestic sales growth, while Construction and Manufacturing & Engineering anticipate marked improvements in exports. 

The Business Confidence Index has remained subdued in recent quarters, reflecting continued sluggish economic performance and high interest rates. Admittedly, within the latest quarter (Q4 2023) weekly data shows sentiment picking up, following more positive economic news towards the end of the survey period, but confidence started the period in negative territory. As a result, at +4.2, the Business Confidence Index remains below the 2010-2019 average of +7.2.

Domestic sales growth continues to slow, standing at 3.6%, year-on-year, in Q4 2023, bringing it closer to the historical average of 3.0%. However, companies anticipate the rate to increase to 4.9% over the coming 12 months. Meanwhile export growth has fallen away somewhat more markedly and, at 2.1% in the year to Q4 2023, it is now below the historical norm (3.0%).

The latter is striking, but not unexpected, given difficulties in global market conditions, not least in mainland Europe where, for example, Germany’s manufacturing sector continues to suffer. And while companies predict a faster rate of export growth in the next 12 months, they are also likely to be aware of wider downside risks to the global economy, including the potential for geopolitical events to impact energy prices and global supply chains.

Companies in the IT & Communications sector are, on average, most optimistic about economic prospects and, at +13.2, their optimism is in line with the sector’s historical norm. The Property sector is now somewhat positive, standing at +4.5, marking its highest level since Q1 2022. This shift is likely influenced, in part, by the Bank of England’s decision to maintain interest rates at the same level for the third consecutive time. However, sentiment in the Business Services sector has dipped to -4.2, and is at -2.8 in Energy, Water & Mining. The former may reflect challenges facing employment agencies, an important part of the sector.

Business sentiment partly reflects sales performance. The IT & Communications sector has received a boost from robust domestic sales growth, reaching 5.7% in the year to Q4 2023 ‒ outperforming other sectors. Companies anticipate that pace to pick up, reaching 7.3%, in the next 12 months, and export sales expectations are highest in this sector, too. While all sectors forecast improved rates of domestic sales, that will be particularly important for Property, Retail & Wholesale and Construction companies, all of which faced various challenges in 2023. Most sectors expect exports to increase faster in the coming year compared to the previous 12 months, with notable improvements forecast in Construction and Manufacturing & Engineering.

• Customer demand is one of the two most widespread growing challenges businesses face, reflecting trends in domestic and export sales. Labour market-related challenges continue to ease as demand weakens, but remain a source of concern.
• Regulatory requirements are the other most significant challenge and are primarily a growing issue in the highly regulated financial sector. They have also become a growing challenge for Retail & Wholesale companies.
• Financial challenges relating to the tax burden, bank charges, late payments and access to capital remain pressing concerns, and may help to partially explain trends in capital investment spending. That said, these challenges are much less pressing than customer demand and regulatory requirements.

Customer demand is one of the two most significant growing challenges businesses face, with 35% citing it as an increasing concern. This aligns with the slowdown seen in both domestic and export sales. Regulatory requirements (37%) are the other main growing obstacle reported by businesses but the issue is heavily skewed by the Banking, Finance & Insurance sector, which is highly regulated. However, regulatory issues have also become an increasing challenge for Retail & Wholesale companies in recent quarters, particularly in Q4 2023. Earlier in the year, respondents from the sector cited Brexit factors relating to VAT for exporting and EU standards; environmental legislation to do with plastic packaging; and Environmental Standards as growing matters for concern.

Customer demand issues are most troublesome for Construction (48%) and Retail & Wholesale (47%) businesses. Both sectors are particularly sensitive to high interest rates, with increased borrowing costs restricting customer demand. However, weakening demand is also a problem across most other sectors. An increasing proportion of businesses in Property, in particular, and Banking, Finance & Insurance, report it as a growing challenge, compared to the previous quarter.

In addition to regulatory requirements and customer demand, companies continue to tackle a host of financial challenges. These pressures have generally been building over recent quarters and are likely to help explain why investment growth remains strained. Most strikingly, around one in four companies cite the tax burden as a rising source of difficulty, compared to its historical norm of 16%, while around one in five report late payments, access to capital and bank charges.

And while labour market-related challenges are trending down, and eased considerably over the course of 2023, they remain problematic for businesses. Indeed, the proportion of companies that cite the availability of non-management and management skills and staff turnover is still above the historical standard. 

• Input prices are rising but the pace continues to slow, and companies anticipate it to soften further over the coming year. However, input price rises remain above the historical average.
• Selling price inflation has also eased, as companies compete for sales, and further moderations are predicted. This is also a likely factor restraining confidence.
• Input price inflation is slowing across all sectors and is expected to continue to do so in the year ahead. Manufacturers anticipate the smallest rises, probably due to easing supply-chain issues as well as lower energy costs. Selling price inflation is expected to moderate for most sectors, but Energy, Water & Mining is a notable exception.

Annual input price inflation eased to 5.1% in the year to Q4 2023. This reflects global commodity prices, with many having either fallen or stabilised, as supply-chains have normalised and lower energy costs have fed through. These trends are expected to continue and explain why companies anticipate further slowdowns over the coming year, to 3.0%, bringing input price inflation closer to the historical norm of 2.5%. However, it is striking that although cost pressures are easing, confidence remains subdued. Other factors, particularly high interest rates, weak economic conditions and the pending general election, are clearly weighing on business sentiment.

Input price rises either slowed or stabilised across all sectors in the year to Q4 2023, compared with the previous quarter. Manufacturers reported the biggest deceleration, marking a second consecutive slowdown, and are expected to slow the most in the next 12 months. This is likely a result of an expectation that supply chain issues have been repaired and that commodity prices will continue to ease. Construction companies faced the fastest rise in input costs (5.9% in the year to Q4 2023). Official statistics report that construction materials prices decreased in November compared to October, although there is some evidence from ONS that plant & machinery equipment prices have continued to rise throughout 2023 and may be contributing towards input cost rises in the sector. However, input price rises are expected to moderate markedly in the year ahead in Construction (3.5%), with the biggest reductions in input cost rises expected in Manufacturing, Banking, Finance & Insurance and Business Services.

A slowdown in selling prices, to 3.3%, year-on-year, in Q4 2023 from 4.1% in Q3, reflects both smaller increases in input costs and the challenging economic backdrop facing businesses, many of whom are unable to pass on in full to customers their input and wage price rises, in a bid to support sales. Companies foresee further moderations in the rate of uplift, to 2.6% in the year ahead, mirroring trends in input cost inflation.

At the sectoral level, Transport & Storage businesses saw the biggest declines in selling price inflation, closely followed by the Energy, Water & Mining sector. And while most sectors anticipate further moderation in the year ahead, the latter is a notable exception. However, the expected increase to 2.3% from 1.6% in the year to Q4 2023 will move growth in selling prices for the sector to be in line with the historical average (2.2%).

• Salary growth has likely peaked, which should help confidence and profits growth. Companies expect the pace of increase to soften slightly in the year ahead, which is consistent with reduced inflationary pressures and lower recruitment activity.
• Employment growth continues to slow, partly reflecting dampening demand and other uncertainties, with similar performance forecast. This is possibly linked to the increase in the National Living Wage, scheduled in April 2024, which may impact hiring decisions in some businesses.
• Companies in most sectors plan to expand their labour force more slowly in the year ahead, with IT & Communications a notable exception. Both Manufacturing & Engineering and Retail & Wholesale anticipate modest improvements, following a challenging year.  

Salary growth appears to have peaked for businesses, which may be bolstering otherwise relatively weak confidence and may start to help profits growth in 2024, after a poor 2023. In the year to Q4 2023, average total salaries increased by 3.9%, down from a historical record of 4.4% in Q3 2022, mirroring the pattern seen in input and selling price inflation. The growth in wages remains almost twice the historical average of 2.0% but most sectors anticipate salary growth to moderate in the next 12 months as inflationary pressures subside and demand for workers softens. However, companies in the Retail & Wholesale sector expect growth to remain at around current rates, which may be influenced, in part, by the upcoming increase in the National Living Wage in April 2024. One major retailer recently raised minimum pay for staff amid news that supermarkets are battling to retain workers.

Employment growth has been trending down since hitting its historical high of 3.5% in Q3 2021. It averaged 1.5% in the year to Q4 2023, reflecting overall weakness in demand and economic uncertainty but running slightly ahead of the historical average of 1.3%. Companies anticipate raising staff levels further in the year ahead at around the current rate. Fewer companies report rising difficulties with staff turnover and with obtaining skilled staff, and while these labour market factors have eased in recent quarters, they remain notable concerns.

Most sectors plan to expand their labour force more slowly in the year ahead than in the past 12 months. IT & Communications is a notable exception, which possibly reflects the fact that future domestic and export sales growth are expected to be highest in this sector. Modest improvements are also expected in Manufacturing & Engineering and Retail & Wholesale, following a challenging year, though the factors like the higher National Living Wage scheduled in April 2024 could change this outlook for some companies, particularly those with a higher proportion of lower-paid workers, which are more common in sectors like accommodation & food and retail.

• Profits growth has declined markedly over recent quarters and has now dipped below the historical average. But businesses anticipate that performance will pick up in the next year as input price inflation continues to subside.
• Marked slowdowns in capital investment spending, while unsurprising given fragile confidence, and a raft of business and economic issues, remains concerning. The Autumn Statement announcement that ‘full expensing’ will be made permanent is unlikely to have had time to filter through to company investment plans.
• Energy, Water & Mining has the strongest growth in capital investment spending, and companies anticipate a similar rate in 2024. The Transport & Storage sector forecasts more notable improvements, while Construction companies plan no further growth in investment in the year ahead.

Profits are growing but at a distinctly slower rate of 2.1%, year-on-year, in Q4 2023. The increase is now lower than the historical average of 3.1%. In the face of weaker sales growth, businesses have been unable to pass the full rate of input cost and wage rises on to customers, eroding profit margins. Companies do, however, anticipate that profits growth will accelerate in the coming year, to 4.6%, as input price inflation and wage rises continue to subside and demand strengthens.

Capital investment spending has fallen markedly and, at 1.6% in the year to Q4 2023, it is below historical standards (2.0%). This comes despite the proportion of companies operating below capacity continuing to trend upwards, something that would usually stimulate a rise in investment, to meet increasing demand. The reason is that companies continue to face several challenges which are weighing on investment decisions. A combination of financial challenges, including high interest rates, slowing profits growth, an upcoming uplift in the National Living Wage in April 2024, uncertainty around the general election, weakening demand and, most importantly, overall weakness in business confidence, are all likely to delay investment plans. It is, therefore, no surprise that companies expect a similar pace of investment increase in the next 12 months to the weak performance of the past year.

It is unlikely that the Chancellor’s announcement of a permanent 100% capital allowance for qualifying business investment (known as full expensing) in the Autumn Statement, which came in late November, filtered through to business investment decisions for next year. In any case, the impact would likely be small, particularly in the short term and is unlikely to represent a quick fix.

Capital investment spending growth is strongest in Energy, Water & Mining, and companies in this sector anticipate a similar rate over the next 12 months ‒ maintaining its premium over other sectors. The Transport & Storage sector forecasts more notable improvements, from 1.7% in the year to Q4 2023 to 2.9%, while Construction companies plan no further growth in investment in the year ahead, likely opting to delay decisions until hoped-for increases in demand materialise, and then filter through to company balances.

• The general malaise of the economy, coupled with various uncertainties and challenges, has affected all sectors broadly equally. Sentiment is neither strongly positive nor negative in any sector. Confidence is highest in IT & Communications, while Property is now in positive territory, probably reflecting the Bank of England’s decision to hold interest rates steady for the third time. However, confidence is negative for Business Services and Energy, Water & Mining.  
• Related to the above, future domestic and export sales growth in IT & Communications is strongest. Most sectors expect improvements in both measures over the next 12 months, which is particularly important for Property and Retail & Wholesale, after a difficult last year. 
• Across all sectors, companies anticipate a slowdown in input cost inflation, with Manufacturers expecting the smallest increases.

Economic performance in the UK remains lacklustre and is contributing to the level of uncertainty felt broadly equally by all sectors. Indeed, business sentiment is neither robustly positive nor negative in any sector, with IT & Communications standing out as the most confident (+13.2), and in line with the historic sector average. This sector has the strongest domestic sales growth in the year to Q4 2023, with marked improvements forecast in the coming 12 months, and it has the fastest export sales growth expectations.

Elsewhere, sentiment has returned to positive territory for the Property sector, likely reflecting the Bank of England’s decision to hold interest rates steady for the third consecutive time. However, confidence has slipped into a negative position for Business Services and Energy, Water & Mining.

The recruitment industry is a significant part of the Business Services sector and the cooling of the labour market is likely to have had a considerable impact on activity and sentiment. Furthermore, the sector includes support functions for other parts of the economy and will tend to reflect weaknesses in the underlying economy, a factor which may be reflected in overall confidence in Business Services.

It is perhaps unsurprising that sentiment in the Energy, Water and Mining sector has dropped given company expectations that profits growth in the year ahead will slip below those seen in the last year. However, the survey offers evidence of other factors weighing on confidence in the sector, including a rise in the proportion of companies reporting government support as a growing challenge to 17%, above the historical average of 12%. Furthermore, 27% of Energy, Water & Mining companies report access to capital as a growing challenge, a trend that has been rising for several quarters. 

Most sectors anticipate a pick-up in both domestic and export sales growth in the next 12 months. However, this is particularly important for Property and Retail & Wholesale, which have had a challenging year.

All sectors expect a slowdown in input price rises over the coming year, with Manufacturers expecting the smallest uplifts. This mirrors patterns seen in global commodity prices, with many having either fallen or stabilised and the recovery of global supply chains and falling energy costs. But there are several risk factors, including geopolitical events and the possibility that these result in disruption to supply chains and commodity price rises.

• The latest survey shows that business confidence is highest in the West Midlands, followed by the North East, while sentiment turned positive in the South West and East of England.  Confidence in Yorkshire & Humber slipped into negative territory and companies in Wales are the most downbeat.

• Domestic sales performance varies notably across regions, but a more even pattern is expected for the year ahead. Companies in the North West have the strongest current and future domestic sales growth and, while weakest in the East of England, businesses in the region anticipate a jump in sales next year.

• Export sales were strongest in the West Midlands and weakest in Yorkshire & Humber. All regions and nations expect improvements in the pace of growth in the next year. This is particularly true for Yorkshire & Humber, the North West and East Midlands, after a difficult year, although businesses in all regions are likely to be aware of the potential wider downside risks to the global economy in the year ahead that could impact exports.

There is reasonable variation in confidence by region and sentiment in most is in positive territory. Confidence increased in 6 of the 11 regions and nations in the latest quarter and sentiment turned positive in the South West and East of England in Q4 2023. However, confidence dipped sharply in the North West, Scotland and Wales, with the latter moving further into negative territory. As a result, Wales is the most downbeat of all other nations and regions in the UK (-6.7).

Companies in the West Midlands are most confident about prospects over the next 12 months, with the Business Confidence Index now at +11.4 in Q4 2023. The region was closely followed by the North East, at +10.8. Both regions have a large manufacturing sector, which remains one of the more confident sectors in the survey. Optimism in these areas is likely supported by the rebound seen in the automotive sector, which is particularly important to the West Midlands economy. In addition, export growth expectations are higher in the West Midlands than elsewhere, providing a further boost to confidence in the region. However, ONS evidence on payroll employment growth by region, though lagging the BCM, suggests that confidence in these regions may be supported by the professional services and business services sectors.

Domestic sales growth has varied considerably across nations and regions in the past year. However, companies anticipate a more even pattern over the next 12 months, and an improved (or at least a steady) performance. The rate of domestic sales expansion is strongest in the North West, at 5.9% in the year to Q4 2023, and companies expect a marked improvement over the coming year (6.4%) ‒ faster than expected elsewhere.

Businesses in the West Midlands have experienced the strongest export sales, at 3.3% in the year to Q4 2023, but they have been weakest in Yorkshire & Humber, having remained largely flat (0.1%). While companies in all nations and regions expect performance to improve in the year ahead, this is particularly true for Yorkshire & Humber, which is expected to see marked increases. Businesses in Yorkshire & Humber anticipate export sales growth to reach 2.7%, in line with the region’s historical average, though this is weaker than any other nation or region. While more optimistic about the year ahead, businesses in all regions are likely to be aware of the potential of wider downside risks to the global economy.

• There are only small variations in sentiment across company type and size, and all are now in positive territory. Domestic sales expectations for privately-owned companies, both SMEs and larger, are better than UK-listed companies and the same is true for export performance.

• The story is similar for profit growth expectations, and is particularly true for larger private companies.

• Capital investment spending by privately-owned companies lags UK-listed companies, but SMEs have slightly healthier R&D spending plans.

Sentiment by company type and size is more evenly distributed compared to confidence by sector or region. The Business Confidence Index is now positive for all company types and sizes compared to the previous quarter. While there have been improvements for some, most notably UK-listed companies which has moved into positive territory, sentiment has fallen in others, including large private companies. In other cases, confidence has largely flatlined. These trends reflect the ongoing difficulties businesses face domestically and internationally.   

Privately-owned companies, both SMEs and larger (those employing more than 250 staff), anticipate somewhat healthier domestic sales growth than UK-listed companies (5.3% compared to 4.2%). These trends also hold for export sales, and relative to UK-listed businesses, privately-owned ones, especially the larger ones, report stronger increases in profits.

However, privately-owned companies have slightly weaker capital investment spending increases compared to UK-listed companies, but SMEs have slightly stronger R&D spending plans. 

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