Business confidence at record high in quarterly index

• Business confidence surges to all-time high, ICAEW survey finds.
• Vaccine success and declining infection rate likely to account for positive reading.
• Record domestic sales expected from consumer-led recovery.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM), published today (THURSDAY 20 MAY 2021), found optimism at 38.5 on the quarterly index, its highest level since the survey was launched 17 years ago and second highest since 2014. The record reading for Q2 2021 signals that a large majority of companies surveyed expect economic conditions to improve over the next 12 months, with record domestic sales forecast. [1]

The continued success of the vaccine rollout programme in the UK and sharp decline in Covid infection rates is likely to explain why businesses are so confident for the year ahead, ICAEW said.

The lifting of Covid restrictions, together with accumulated household savings from a year of lockdowns, make a sharp rise in consumer spending likely for the rest of 2021.

Business confidence had returned to positive territory in Q1 and the record levels this quarter reflect rising optimism about large parts of the economy reopening. 

The findings from the BCM come after figures from the Office for National Statistics showed the UK economy had contracted by 1.5% in the first three months of 2021, but gathered speed in March as lockdown restrictions were eased. 

Michael Izza, ICAEW Chief Executive, said:

“Business confidence has hit a record high as companies look forward to the economy reopening. This increased optimism is not surprising given the success of the vaccine rollout, decline in Covid rates and the extension into the autumn of key government support schemes, such as furlough. 

“Companies now expect exceptional levels of domestic sales, as well as rising profits and increasing investment. They are thinking about hiring staff.  Much of this depends on consumer confidence also lifting and households being ready and willing to spend.

“The past year has been a terrible struggle for businesses and confidence was at an all-time low in early 2020. We hope this strong bounce back in confidence will in turn deliver a year of strong growth, and the BCM is the clearest indicator yet that the rest of 2021 could see a historically strong economic rebound from the unprecedented lows of the past year.

“However, even as commercial life in this country unlocks, companies will be mindful of wider health and economic problems around the world which could yet dampen or even threaten the recovery for UK businesses. 

“The UK economy is also closely intertwined with other parts of the world and slower vaccination rates elsewhere could have an effect on our own economic recovery. For example, the shutting of production shifts in our automotive industry because of supply chain problems and subdued economic growth in the rest of the world show how much our economic recovery is reliant on the health of the rest of the world.”

Record domestic sales growth expected, but uncertainty remains

While business confidence is high, it may yet prove to be fragile given both global economic and health risks, which the UK is not necessarily insulated from, and the possibility that the level of consumer recovery may disappoint. [2]

However, companies expected to see record growth in domestic sales over the next 12 months, and exports are also likely to increase, though not at the same rate. [3]

Businesses also expected profits to increase in line with domestic sales and investment to rise over the coming year in line with profits. [4]

Many companies predicted employment levels would rise at their fastest rate in six years, reversing a small fall over the past year. The government’s furlough scheme may have prevented greater job losses during this period, the report said. [5]

The report also found that confidence among UK-listed companies was higher than among overseas-listed businesses. The UK economy is set to outperform most of Europe in 2021.

Transport problems continue to grow for exporters

A lack of customer demand and regulatory requirements were some of the top rising challenges faced by businesses, with transport problems ranked third. [6] 

Transport issues were a key area of concern for those companies that export. A shortage of road-freight and air-freight capacity, delays at ports because of Brexit disruptions and the recent temporary closure of the Suez Canal were the mostly likely reasons for this.

Against a backdrop of tough trading conditions, businesses in most sectors struggled with domestic sales over the past 12 months but all sectors expected strong growth in domestic sales over the next 12 months.

Widespread improvements across all regions

Confidence among businesses in all UK nations and regions improved in the second quarter of 2021, most markedly in the West Midlands as the release of pent-up demand is set to drive an expansion in the region’s manufacturing sector, the report found. [7] 

Confidence was lowest in the North East, with businesses reporting the most subdued projections for domestic sales growth. Its predicted growth in exports also trailed the UK average. This is likely because sales were not expected to rebound as strongly, as they did not fall in the region as much as they did nationally over the past year.

ENDS 

Notes to editors: 
 
***The full report is available on request*** 

1. After returning to positive territory in Q1 2021, the Business Confidence Index rose to 38.5 in Q2, a record high for the survey. The previous highest reading was 37.3 in Q2 2014.
2. The report said there remained many sources of uncertainty, such as a weaker-than-expected rebound in consumer spending, the existence of economic and health risks emerging from other parts of the world and possible job losses, stemming from the pace of economic restructuring and the planned ending of the government’s furlough scheme in September 2021.
3. At 7%, the expected overall rise in domestic sales will, if achieved, be the highest growth rate since the survey began, after a contraction over the last 12 months. Exports are expected to rise by 3.6% after a decline of 0.7% over the past year.
4. Capital investment is projected to rise by 2.8% and research and development spending by 1.9% over the next year.
5. Businesses expected their employment levels to rise by 2.5% over the next 12 months, despite reducing their headcounts by 0.8% over the last year.
6. Customer demand (41%) and regulatory requirements (38%) were cited as rising challenges by businesses.
7. Domestic sales (7.9%) and exports (4%) in the West Midlands are expected to outpace the national figure in the next 12 months.
8. The Business Confidence Monitor (BCM) survey began in 2004.
9. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 18 January 2021 and 12 April 2021. Businesses were categorised in terms of size (number of employees), region and industry sector. Regional classification used was ONS Government Office Regions. 1,000 Chartered Accountants across the UK were interviewed.
10. Business Confidence Index methodology

The Business Confidence Index is calculated from the responses to the following:

“Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months?”

A score was applied to each response as shown below, and an average score calculated:

Using this method, a Confidence Index of +100 would indicate that all survey respondents were much more confident about future prospects, while -100 would indicate that all survey respondents were much less confident about future prospects.