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Confidence weakens but remains high as businesses grapple with rising costs and skill shortages

Author: ICAEW

Published: 24 Nov 2021

Tuesday 23 November 2021: Business confidence in the UK has weakened after hitting record-breaking levels in the past two quarters, a survey of chartered accountants published today has found.
  • Business confidence weakens after successive quarterly peaks, ICAEW survey finds
  • Skills crisis as businesses struggle to fill vacancies, but salaries expected to rise
  • Significant variation among sectors despite strong sales hopes

Sentiment tracked by ICAEW’s Business Confidence Monitor™ (BCM) for Q4 found optimism at 35.8 on the quarterly index, slightly lower than the readings recorded in the previous two quarters. [1]

The small fall in optimism likely reflected the problems businesses have experienced, both at home and abroad, from rising costs, supply chain disruption and difficulties with recruitment.

Experiences varied significantly among sectors. Sentiment was highest among companies in IT and communications, transport and storage and business services, which were less affected by supply difficulties and rising costs, and which reported the strongest outlooks for growth of domestic sales and exports in the year ahead. [2]

By contrast, sentiment was weakest among retailers, manufacturers and construction companies, where those supply issues and rising input prices had taken their toll. The lack of availability of prospective recruits with non-management skills also troubled these sectors, particularly in manufacturing and construction. [3] [4]

Nevertheless, salaries are expected to rise by 2.5% next year, which would be the sharpest increase in a decade. This will be dependent on whether current skills shortages persist, but businesses had already seen an increase in labour costs. [5]

Meanwhile, transport issues were particularly acute for manufacturers and retailers. [6]

Office for National Statistics figures published last week showed that inflation had surged at its fastest pace in almost a decade, reaching 4.2% in the year to October, mainly due to higher fuel and energy prices.

Michael Izza, ICAEW Chief Executive, said:

“It’s unsurprising that business confidence has weakened in this quarter given the problems of rising costs and supply chain issues that companies have reported. But optimism remains very high and businesses will be hoping that the economic recovery continues into 2022.

“While strong sales growth is forecast for the year ahead, confidence is not consistent across all sectors of the economy. With more pressures reported by retailers, manufacturers and construction firms, it could be a tough winter in these sectors as cost pressures and supply chain problems persist.

“As we emerge from the pandemic, it is vital nothing derails the recovery. Companies must already factor in the upcoming National Insurance hike and increasing energy prices, as well as the possibility of a rise in interest rates, and they really need as much stability as possible in the wider business environment.”

In a separate survey of the respondents who said they had had vacancies which were hard to fill, they cited a lack of skills and experience, and competition from other firms as some of the key reasons. Two-fifths of those businesses said that middle-range technical and manual skills were particularly hard to come by. [7] [8]

Also in this separate survey, a quarter of businesses that were struggling to fill vacancies cited EU workers leaving the UK as a reason for not being able to fill a particular role. [9]

To address these recruitment issues, more than two-thirds of those businesses either increased salaries for new applicants or upped their spending on recruitment. [10]

Employment rose by 1.3% over the last year, the first period of year-on-year growth since the start of the pandemic. There was little evidence that the phasing out of the government’s furlough scheme caused a surge in job losses, ICAEW said, and businesses predict a sharp rise in hiring over the next 12 months. [11]

Domestic sales expectations for the next 12 months remain historically high, the BCM found, but have fallen slightly quarter-on-quarter. However, in Q4 2021 export growth was lower than pre-pandemic levels, with Brexit a possible contributory factor. [12]

Challenges faced by companies

Regulatory requirements were the most common challenge faced by companies, with coronavirus restrictions and Brexit trading complexities likely factors. [13]

And more companies reported the tax burden as an issue than did so in previous quarters, possibly reflecting the removal of business-related government support schemes and anxieties associated with possible changes to future tax rates, ICAEW said. [14]

Confidence consistently strong across the UK

Business confidence was firmly positive across all nations and regions in the UK as companies forecasted strong sales growth for the year ahead.

Companies in the East Midlands achieved the sharpest increase in domestic sales last year, while Welsh businesses saw the fastest rise in exports and are the most bullish about its growth in the year ahead. [15]

Notes to editors:

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

  1. The Business Confidence Index for Q4 2021 stood at 35.8, slightly lower than the pre-pandemic peak of 37.3 in Q2 2014.
  2. Businesses in IT & communications, transport & storage and business services forecast rises in domestic sales of 8.7%, 8.2% and 7.4%, respectively, over the next 12 months. Companies in IT & communications, transport & storage and business services also expect increases in exports of 5.3%, 4.7% and 4.4%, respectively, over the next 12 months.
  3. The Business Confidence Index in Q4 2021 stands at +28.4 in retail & wholesale, +29.1 in manufacturing & engineering and +34.6 in construction.
  4. 45% of companies in manufacturing & engineering and 44% of businesses in construction cited the availability of non-management skills as a growing challenge.
  5. Salary growth stood at 1.5% in the year to Q4 2021, a rate that was slightly below the UK historical average but markedly stronger than during the peak of the pandemic. Salaries are expected to rise at the faster rate of 2.5% over the next year.
  6. 71% of manufacturing & engineering and 60% of retail & wholesale cited transport problems as a growing challenge.
  7. A half of respondents (51%) had vacancies that were hard to fill over the last 12 months, while 43% of these said middle-range technical and manual skills were involved in these hard-to-fill vacancies. This data is based on a survey of these 554 respondents.
  8. A lack of suitable skills (65%), suitable experience (59%) and competition from other employers (64%) were cited by respondents as reasons why their vacancies were hard to fill. This data is based on a survey of these 554 respondents
  9. 28% said EU workers leaving the UK was a reason why vacancies here hard to fill. is based on a survey of these 554 respondents
  10. 67% increased spend on recruitment to address hard-to-fill vacancies, while 63% increased salaries for new applicants. This data is based on a survey of these 554 respondents.
  11. Companies are planning a 2.9% increase in payrolls over the next 12 months.
  12. Domestic sales increased by 3.2% over the last 12 months and are expected to grow by 6.3% in the year ahead. Exports increased by 1.4% over the last 12 months and are expected to grow by 4% in the year ahead.
  13. 40% of companies cited regulatory requirements as a growing source of difficulty.
  14. 14% of companies cited the tax burden as a growing challenge.
  15. Domestic sales increased by 4.8% year-on-year in Q4 2021 in the East Midlands. Exports increased by 4.4% in Wales over the 12 months to Q4 2021.
  16. The Business Confidence Monitor (BCM) survey began in 2004.
  17. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 19 July and 15 October 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.
  18. 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:

    Variable Score
    Much more confident +100
    Slightly more confident +50
    As confident 0
    Slightly less confident -50
    Much less confident -100

    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.