Sentiment tracked by ICAEW’s Business Confidence Monitor™ (BCM) for Q2 2022 put confidence at 18.6 on the quarterly index, down from its peak of 47 three quarters ago. Cost pressures and staff shortages were hampering expectations of a more positive outlook, ICAEW said. 
The results suggest that the government should take action with targeted, strategic financial measures to tackle the cost of living pressures and high inflation, to relieve households and stop issues spilling further into the economy, ICAEW added.
Cost pressures mounting
Businesses expect input price inflation to rise by 4.2% in the next 12 months, which would be the joint-highest rate since the survey began in 2004. This reflects ongoing supply-chain disruptions and also the sharp rise in energy and commodity prices following Russia’s invasion of Ukraine, ICAEW said. 
To support their margins, businesses are raising prices to pass costs on, with the 2.3% increase over the past year the fastest rise in the survey’s history. Businesses plan another record increase over the next 12 months. Higher selling prices, along with increasing sales, means that profits continue to rise after declines in most of the past year. 
Staff turnover and the availability of non-management skills were the most frequently cited growing challenges, each affecting two in five businesses. This was a possible repercussion of people not seeking a return to work following the pandemic, particularly at a time when demand in the economy is high. 
Sentiment in the quarter varied markedly by sector, and was highest in IT and communications, transport and storage and business services. It was lowest in construction, manufacturing and engineering and energy, water and mining. 
Michael Izza, ICAEW Chief Executive, said:
“After reaching a record high in mid-2021 as we emerged from the third lockdown after the success of the vaccine rollout, business confidence has fallen back significantly.
“Sales growth has been healthy, following contractions during the pandemic, but businesses are aware that this could be derailed by the economic threats posed by the cost-of-living crisis, soaring inflation and global instability from the Ukraine-Russia war.
“While none of these problems are of the government’s making, they must understand the emotional and financial toll on people and families. The Chancellor should address the high cost of living with targeted, strategic financial measures to prevent disastrous consequences for people’s standard of living and the amount of spending in the economy, which could result in real pressure on businesses.”
Sales growth remains strong
Nevertheless, domestic sales rose year-on-year after declining in Q2 2021 and are forecast to increase further in the coming 12 months amid continued expectations of strong pent-up demand in the post-pandemic economy. 
Exports grew more moderately, but growth is set to improve next year as coronavirus restrictions are gradually removed in key markets, ICAEW said. 
Wage growth at decade high
Staff turnover and skills availability, combined with high inflation, drove businesses to raise salaries to their highest point in 10 years, the BCM found. Wages are also expected to go up in the year ahead, adding further pressure to the economy. 
However, issues with recruitment are unlikely to impede employment growth, with companies planning to grow their workforce by 3.2%. 
The proportion of businesses operating below capacity is only slightly above the record low of last quarter, which could explain why companies are increasing capital investment at a near-record pace. 
Confidence eases across the country
Business confidence weakened across most parts of the UK, the survey found, with those in Scotland among the least confident. 
Firms in the East and West Midlands were among the most confident, with the latter boosted by strong domestic sales. 
Notes to editors:
***The full report is available on request***
1. The Business Confidence Index for Q2 2022 stood at 18.6 in Q2 2022, significantly lower than its record level of 47.0 in Q3 2021.
2. Input price inflation rose by 3.8% year-on-year, the highest rate since the end of 2008, and is forecast to rise at 4.2% over the next 12 months, which would be the joint-highest rise – along with Q4 2008 – since the survey began in 2004.
3. Profits have risen by 6.0% in the year to Q2 2022, the sharpest increase in nearly 15 years, and are forecast to grow by 5.7% in the coming year (after declining by -2.5 in Q2 2021). Meanwhile, selling prices increased by 2.3% year-on-year in Q2 2022, the sharpest increase since the survey began, and are forecast to rise by 2.8% in the coming year, which would be another record increase.
4. The proportion of businesses being increasingly challenged by staff turnover and the availability of non-management skills was 43% and 40%, respectively. The proportion of businesses having problems with staff turnover was at its highest rate since the survey began.
5. The Business Confidence Index Q2 2022 stood at 32.9 in IT and communications, 31 in transport and storage, and 19.9 in business services. The Index stood at 9.5 for construction, 14.1 in manufacturing and engineering and 14.6 in energy, water and mining.
6. Domestic sales have risen by 6.4% since Q2 2021 (after contracting by -1.7% in Q2 2021) and are expected to rise by 6.5% over the next year
7. Export sales increased by 2.9%, year-on-year, in Q2 2022 and are expected to grow by 4.5% in the year ahead.,
8. Average total salaries rose by 2.7% in the year to Q2 2022, with a further 3.2% increase forecast over the next 12 months.
9. Annual employment growth stood at 2.7% in Q2 2022 and is forecast to increase by 3.2% in the coming 12 months.
10. The proportion of companies operating below capacity is 40%, marginally above the record low of 36% last quarter. Meanwhile, companies are increasing their capital investment by 3.4% in the year to Q2 2022, the fastest rate since Q2 2005, while a further 2.7% rise is planned for next year.
11. The Business Confidence Index stood at 12.4 in Scotland.
12. The Business Confidence Index stood at 24.3 in the East Midlands, and 26.7 in the West Midlands. In the West Midlands, domestic sales grew by 7.4% in the past 12 months.
13. The Business Confidence Monitor (BCM) survey began in 2004.
14. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 17 January 2022 and 21 April 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.
15. 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:
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.