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Tougher economic conditions hamper UK business confidence

Author: ICAEW

Published: 26 Jul 2023

Business confidence in the UK remains lower than the pre-pandemic average as concerns about high inflation, record wage pressures and rising interest rates bite, a survey of business leaders published today (Wednesday 26 July 2023) has found.
  • Business confidence below pre-pandemic average but still positive, with property companies least optimistic
  • Inflation rose at record rates although businesses expect it to ease in the year ahead
  • Salary growth at all-time high with wage pressures highest in IT and communications

Sentiment tracked by ICAEW's Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – put confidence at 6.1 on the index for Q2 2023, an improvement on the previous quarter (2.5), but below the pre-pandemic average of 7.2 from 2010-19. [1]

Domestic sales growth has slowed to its lowest level since Q3 2021, impeding confidence, the survey found. [2]

Weekly BCM data revealed that business confidence declined during the research period, standing at -4.0 in the final week of the survey, partly reflecting the impact on sentiment of two interest rate increases in May and June, ICAEW said. [3]

Confidence in the second quarter was only negative in the property and retail and wholesale sectors, reflecting their direct exposure to rising interest rates and, for the former, a weakening housing market. Property companies also recorded the second-lowest domestic sales growth of all sectors. [4]

Input prices rose at their fastest rate since the survey began in 2004, but businesses expect input price inflation to ease sharply in the year ahead due to falls in the prices of energy and raw materials, ICAEW said. [5]

Selling prices also rose at their fastest-ever rate this quarter, with manufacturers and retailers and wholesalers reporting the biggest increases. However, companies expect selling price inflation to drop to its lowest level since Q4 2021 over the next 12 months, reflecting the slowdown in input costs. [6][7]

Salary growth gained momentum in Q2 and is now at a record high rate for the survey. IT and communications companies have seen the largest increases, reflecting their continued need for highly-skilled people. The pace of salary growth is expected to weaken over the next 12 months, but only slightly compared to the pattern seen in input and selling price inflation. [8]

ICAEW said that to boost confidence, the government must formulate a plan to deliver long-term growth by increasing the resilience of the UK economy and the transition to net zero, while enabling small businesses to operate more sustainably in a difficult economic environment.

Suren Thiru, ICAEW Economics Director, said:

"These findings confirm that the economy remained anaemic in the second quarter as high inflation, record wage pressures and rising interest rates stymied business confidence and domestic sales.

"While the marked easing in firms' pricing expectations suggests that inflation will continue dropping back, the impact of historically high wage costs point to the headline rate remaining stubbornly above the Bank of England's 2% target well into 2024.

"Our figures suggest a difficult second half of 2023 with mounting concerns over rising interest rates, a higher tax burden and waning customer demand all likely to weaken activity in the months ahead."

Michael Izza, ICAEW Chief Executive, added:

"It's little surprise that business confidence is historically weak as companies continue to struggle with high inflation and successive interest rate rises, and the drop-off in optimism during the survey period reflects what our members tell us about the problems that they face.

"The report also makes for rather sobering reading for the property and retail sectors, both of which are exposed to high interest rates clearly weighing on sentiment.

"It's time for a government plan to deliver a growing and resilient economy which enables businesses of all sizes to operate effectively."

Regulations and customer demand key challenges

Regulatory requirements were a growing challenge for 37% of businesses. When a subset of respondents were asked what these issues were, they cited general concerns over increased scrutiny and reporting requirements, and a perceived greater administrative burden, which relates to existing as well as new regulations.

Specific topics arose in certain sectors. Retailers and wholesalers were troubled by requirements relating to Brexit, while businesses in the banking, finance and insurance sector cited Financial Conduct Authority regulation. [9]

Customer demand was a major challenge for over a third of businesses, reflecting slowing sales and an uncertain economic background. Financial challenges continued to beset companies, with 29% citing the tax burden as an issue following the rise in corporation tax to 25% coming into effect in April. Bank charges and access to capital were widespread problems for businesses, particularly in the property sector. [10] [11]

Growth in capital investment spending also slowed and is expected to moderate further in the year ahead, reflecting fragile business confidence. [12]


Notes to editors:

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

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

The Business Confidence Monitor (BCM), which is one of the largest and most comprehensive quarterly surveys of UK business activity, began in 2004. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 27 March and 23 June 2023. Businesses were categorised in terms of size (number of employees), region and industry sector. Regional classification used was ONS Government Office Regions.

  1. The Business Confidence Index for Q2 2023 stood at 6.1, up from 2.5 last quarter, and below the Q1 2010 to Q4 2019 average of 7.2.
  2. Domestic sales growth stood at 4.9% in Q2 2023.
  3. Weekly Business Confidence Index for Q2 2023 stood at -4.0 in the last week of the research period.
  4. The index stood at -9.4 for property and -1.0 for retail and wholesale. Domestic sales growth in the property sector increased by 2.9% in the year to Q2 2023.
  5. BCM measure of input price inflation over the year ahead expected to ease, averaging 3.6%, after rising by 6.2% year-on-year in Q2 2023.
  6. BCM measure of selling prices are expected to rise at a more modest pace by 2.7% over the next 12 months, after rising by 4.2% year-on-year in Q2 2023.
  7. BCM measure of selling prices stood at 5.7% for manufacturers and 5.0% for retail and wholesalers in Q2 2023.
  8. Salaries are expected to rise by 3.6% over the next 12 months after they increased by 4.4% in the year to Q2 2023. Salary growth for IT and communications businesses stood at 4.9%.
  9. 32% of those asked said Brexit-related regulation was a concern, while 29% of businesses in the banking, finance and insurance sector said the same about FCA requirements.
  10. 34% and 29% of businesses cited customer demand and the tax burden as a  challenge, respectively.
  11. 19% and 16% of businesses cited bank charges and access to finance as a growing challenge, respectively. 30% of property companies were also increasingly troubled by bank charges, while access to capital remains a prominent challenge (32%) for the sector.
  12. Capital investment spending will average 1.7% in the year to Q2 2024, down from 2.5% in Q2 2023.
  1. 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.


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