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Business confidence plummets as companies wrestle with economic and political disarray

Author: ICAEW

Published: 15 Nov 2022

Business confidence in the UK is now deep inside negative territory as companies forecast a tough 12 months amid difficult economic conditions, a survey of chartered accountants published today (TUESDAY 15 NOVEMBER 2022) has found.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for Q4 2022 puts confidence at -16.9 on the quarterly index, the weakest since Q4 2020, and down sharply from -5 in the previous quarter. Confidence has fallen significantly since its recent peak of 47 in the third quarter of 2021, and was weakest among construction and retail firms. [1] [2]

The stark economic conditions that businesses face, and recent political turmoil, likely drove the large drop in optimism, with companies exposed to high inflation, more financial challenges, ongoing recruitment difficulties and slowing domestic sales. Input and labour costs have continued to rise, while investment is set to slow as profits growth is squeezed, the study of chartered accountants working for UK businesses found.

As the Chancellor considers the difficult job of balancing Britain’s books, he must also use Thursday’s Autumn Statement to restore confidence, credibility and long-term environmentally sustainable growth to the UK economy, the Institute said. He should also provide clarity on plans for further help when the energy support schemes end in April.

Financial distress increases 

An increasing number of companies said they faced growing difficulties from late payments, access to capital and bank charges – all traits of rising financial distress within the economy. 

One in five businesses said late payments were a growing challenge, with SMEs and businesses in the energy, water and mining, and property sectors, particularly hard hit by this, the report found. [3]

Access to capital was also a problem for one in five businesses, the highest proportion since Q1 2013. This suggests that investors and lenders – wary of the looming recession and increased uncertainty – are becoming more reluctant to loan money. One in three property businesses cited this as a growing challenge, higher than in any other sector. [4]

As the corporate sector begins to feel the brunt, the proportion of companies reporting problems with bank charges also increased. [5]

Record inflationary pressures as wage growth hits 17-year high

Driven by higher labour and input costs, selling price inflation reached another record high for the survey. Input price inflation was also at its highest rate since the BCM began in 2004, reflecting the surge in energy costs and ongoing supply-side disruptions businesses faced. [6]

Salaries grew year-on-year at a rate not surpassed since late 2005, while a similar rise is planned for next year. This wage hike can be partly explained by the tightness of the labour market, as well as higher inflation, with the availability of non-management skills and staff turnover remaining the most widespread problems for businesses. [7][8]

Suren Thiru, Economics Director for ICAEW, said:

“The warning lights of recession are flashing red on most indicators, reflecting record cost pressures and the chilling effect of persistent political and economic uncertainty. 

"Construction endured an especially difficult quarter as rising interest rates, prolonged uncertainty and inflation weighed on activity. Retailers are also feeling the brunt of the current headwinds as people cut back on spending. 

“Historically high input costs for businesses, and the marked acceleration in wage pressures, suggest that inflation could stay higher for longer than the Bank of England predicts. 

“The notable uptick in difficulties in accessing capital and from late payments is concerning as it diminishes cashflow, leaving firms more exposed to external shocks, including a surge in energy costs as government support expires.”

Michael Izza, ICAEW Chief Executive, said:

“It comes as no shock that business confidence has fallen back to levels last seen during the pandemic, as companies across the UK struggle to cope with ongoing economic, financial and political pressures.

“On Thursday, the government must outline a plan to restore confidence, generate environmentally sustainable long-term economic growth, and bring opportunity and prosperity to our communities and regions.

“It is also vital government provides clarity on energy support schemes beyond April, to bring certainty to businesses.”  

Sales growth slows

Domestics sales increased year-on-year at a slower rate than in the previous quarter, as companies struggled with higher interest rates and growing consumer demand issues. Domestic sales growth is forecast to continue slowing in the year ahead. [9] More companies have above-normal levels of raw materials and components than at any time since the BCM started, which puts significant upward pressure on their costs. 

Export growth, though smaller in scale, fared better than domestic sales and is expected to rise in the next 12 months, likely because prominent issues, such as port delays, Brexit regulation, driver shortages, supply-chain difficulties and restrictions on trading with China, have eased. Weaker sterling may also have prevented exports growth from slowing, ICAEW said. [10]

However, with weaker domestic sales, employment growth is slowing and is expected to moderate in the year ahead, potentially easing pressure on salary increases. [11]

Investment outlook bleak

Profits growth weakened for a second successive quarter to 4%, against a backdrop of rising costs and declining domestic sales growth. [12]

As a result, growth in capital investment has moderated with decade-low increases expected in the year ahead, which could affect the productivity and competitiveness of businesses in domestic and global markets. [13]

Business confidence negative across UK

All regions and nations posted a negative confidence reading in Q4, with businesses in Yorkshire and the Humber and Wales the least optimistic. Welsh businesses are among the most export-intensive in the UK but had the weakest outlook for exports growth in the year ahead. [14]

Companies in Yorkshire and the Humber’s manufacturing sector were exposed to a surge in global energy and commodity prices and have seen the sharpest rise in input costs over the past 12 months. [15]

London, meanwhile, was the least negative part of the UK. The capital has seen a slightly slower rise in input costs than the rest of the UK. [16]


Notes to editors:

CONTACT: ICAEW media office tom.mackintosh@icaew.com or 07866 853841

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

1. The Business Confidence Index stood at -16.9 in Q4 2022, the weakest since Q4 2020 when the Index stood at -19.

2. The Business Confidence Index for construction stood at -30, and -27.1 for retail.

3. 20% of businesses reported late payments as a growing problem in Q4 2022, while 24% of SMEs cited it as an issue. Across sectors, 29% of companies in energy, water and mining, and 28% in property, also reported it as a growing problem.

4. 17% of businesses cited access to capital as a growing challenge in Q4 2022, the highest since Q1 2013 at 17%, as did 33% of businesses in the property sector.

5. 13% of businesses cited bank charges as a growing challenge in Q4 2022.

6. BCM measure of selling prices stood at 3.3% in the year to Q4 2022, surpassing the previous high of 3.1% from last quarter. The BCM measure of input prices stood at 5.4% in the year to Q4 2022, the highest rate since the survey began in 2004.

7. Annual total salary growth in Q4 2022 stood at 3.7%, a rate not surpassed since Q4 2005, while a rise of 3.6% is planned in the year to Q4 2023.

8. The availability of non-management skills and staff turnover were the most widespread challenges, with 43% and 42% of businesses, respectively, reporting these as growing issues.

9. Domestic sales increased by 5.4% in Q4 2022 but are predicted to rise at the slower pace of 4.5% over the next 12 months.

10. Exports sales rose by 3.9% in Q4 2022.

11. Employment growth stood at 2.8% in Q4 2022 and will drop by 4% in the year to Q4 2023.

12. Annual profits growth eased to 4% in Q4 2022 and are expected to increase by 3.6% in the year ahead.

13. Capital investment growth stood at 2.9% in Q4 2022 and is expected to grow by 1.4% in the year ahead.

14. The Business Confidence Index in Yorkshire and the Humber and Wales stood at -27.4 and -25.2, respectively, in Q4 2022. Exports in Wales are set to grow by 1.9% over the next 12 months.

15. BCM measure of input prices in Yorkshire and the Humber increased by 6.1% year-on-year in Q4 2022.

16. The Business Confidence Index in London stood at -6.3 in Q4 2022. Exports are set to grow in London (4.6%), South West (4.7%) and West Midlands (6.1%) in the year ahead.

17. The Business Confidence Monitor (BCM) survey began in 2004.

18. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 25 July 2022 and 14 October 2022. 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.

19. 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.