Business confidence remains at record high as economy gets sales boost

• Business confidence at record high for second consecutive quarter, ICAEW survey finds
• Strong sales growth projections key to confidence boost
• Companies face new challenges as economy reopens

Business confidence has hit a record high for the second quarter in a row, a survey of chartered accountants published today (FRIDAY 20 AUGUST 2021) has found.

Sentiment tracked by ICAEW’s Business Confidence Monitor™ (BCM) found optimism at 47 on the quarterly index, its highest level since the survey was launched in 2004 and surpassing the previous record set last quarter. [1]

The optimism was shared by businesses of all sizes across all sectors, nations and regions in the UK.

The record reading was a likely reflection of the expectation of strong sales growth in the year ahead, especially in the domestic market where a record rise of 7.4% is predicted over the coming 12 months. Companies also expect a sharp boost in export sales, which will rebound to pre-pandemic rates of increase. [2]

However, the likelihood of confidence remaining positive is highly dependent on the COVID-19 situation not deteriorating further, ICAEW said. Decisions on interest rates, the winding down of support schemes, such as furlough, could also have an impact on future business sentiment.

Office for National Statistics figures published last week showed that Britain’s economy grew 4.8% between April and June, below the 5% that the Bank of England had forecast.

Michael Izza, ICAEW Chief Executive, said:

“Business confidence has now hit record levels for two quarters in a row - companies are clearly benefitting from rising customer demand as the economy reopens and life begins to return to normal. The high level of optimism is unsurprising but it remains vulnerable to a possible resurgence of COVID-19 as we head into the autumn. 

“While confidence is high across all sectors, with companies reporting record expectations for domestic sales growth, they also told us they face challenges from skills shortages, wage increases and rising costs.

“This is a crucial stage for the economy. Despite having to cope with the winding down of government financial support and possible interest rate rises, businesses are definitely bouncing back, but finances are fragile and any additional costs could threaten the recovery.”

Businesses face different challenges as economy rebounds

Companies have faced growing issues with the labour market as the economy unlocked. Staff turnover was a growing challenge for 23% businesses in Q3 2021, compared to just 12% in the previous quarter, while there has also been a sharp rise in the number of firms struggling to find skilled staff. [3]

Meanwhile, transport problems have become more widespread, particularly for manufacturers. However, late payments have diminished as a growing concern as companies have rebuilt their finances. [4]

Just a third of firms cited customer demand as a growing challenge. The figure has trended downwards as the economy has opened up. [5]

More companies than in previous quarters also cited regulatory requirements as an increasing source of difficulty. [6]

Input costs and prices rising, but not out of control

As the economy expands, businesses expect costs and prices to rise, especially where demand has returned but supply chains have been constrained. This is already happening both domestically and globally, with increases in prices for raw materials and fuel, ICAEW said.

Input prices increased in Q3 and are expected to rise further over the coming year. As a result, businesses have put up their selling prices, which they expect to increase by 1.4% in the next 12 months. [7]

Businesses plan more investment

Spare capacity has fallen to its lowest level for five years, at 46%, reflecting the strength in demand and companies withdrawing unused capacity. Profits, meanwhile, were slightly down on a year ago but companies expect them to rise substantially in the year ahead. [8]

As a result of more optimistic sales projections, companies anticipate spending more on capital equipment, and research and development, over the next 12 months. [9]

Widespread optimism across most regions, led by London and West Midlands

Confidence has risen to record levels in most of the UK, the report found, with the West Midlands and London leading the way. Businesses in the capital are also planning to increase staffing levels at their fastest rate in over a decade.

Meanwhile, confidence in the East Midlands has rebounded strongly after the region’s businesses particularly suffered during the pandemic. [10]

However, firms in the north of England have become increasingly challenged by staff turnover and the availability of non-management skills. [11]

ENDS 

Notes to editors: 

***The full report is available on request*** 

1. After hitting record levels during the previous quarter, the Business Confidence Index rose to 47 in Q3, another record high for the survey. The previous highest reading was 38.5 in Q2 2021.
2. Domestic sales are slightly lower than a year ago at -0.2% but are expected to rise by 7.4% over the coming 12 months, a record outlook for the survey. Exports sales are expected to increase by 4.4%.
3. 23% of businesses cited staff turnover as a rising challenge in Q3 2021, up from 12% in Q2 2021. Meanwhile, 20% of businesses also said the availability of non-management skills was a growing issue, while the availability of management skills were becoming more problematic for 13% of companies.
4. 27% of businesses cited transport problems as a rising area of difficulty, while late payments are now a growing issue for 21% of companies, a lower rate than reported in recent quarters.
5. 33% of businesses cited customer demand as a growing challenge in Q3 2021, compared to 52% in Q4 2020.

1. The number of companies citing regulatory requirements as an increasing difficulty was up from 33% to 40% over the same period.

1. Input prices were 1.6% higher in Q3 2021 than a year ago and companies expected another 2% increase in the year ahead. The average input price rise over a three-year period 2017-19 was slightly higher, at 2.3%. Selling prices in Q3 are 0.6% higher than a year ago and are expected to rise by 1.4% over the next 12 months.
2. The proportion of companies operating with spare capacity has declined from 63% in Q4 2020 to 46% in Q3 2021, the lowest level since Q3 2015. Profits in Q3 2021 were 1.2% below their level a year ago but are expected to rise by 7.4% in the coming 12 months.
3. Companies anticipated that their spending on capital equipment would rise by 3.1% over the next 12 months, while their research and development budgets are expected to rise by 1.7%.
4. The Business Confidence Index for the East Midlands stands at +50.2.

1. In both Northern England and the North West, 30% of companies cited staff turnover as a growing challenge, the highest rates across the UK. Northern England also has the highest proportion of companies (27%) reporting the availability of non-management skills as a growing issue.

1. The Business Confidence Monitor (BCM) survey began in 2004.
2. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 19 April 2021 and 16 July 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.
3. 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.

About ICAEW

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*Source: CAW, 2020 – Interbrand, Best Global Brands 2019