Business confidence plunges as firms in crisis over cost of doing business

• Business confidence falls into negative territory after record peak last year
• Cost of doing business crisis pushing UK closer to recession amid record input costs
• ICAEW calls for targeted support for struggling businesses and households

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for Q3 2022 put confidence at -5 on the quarterly index, the first negative reading since the pandemic and significantly down on its peak of 47 a year ago. [1]

Higher costs, significant skills shortages and tax and transport challenges likely drove the decline in optimism and demonstrated the cost of doing business crisis that companies faced, ICAEW said.

Economic conditions are expected to be even tougher in the year ahead and, in a climate of high inflation with energy costs set to continue rising, ICAEW said that short-term targeted support will be needed to keep many businesses afloat.

Direct fiscal support will also be required to help households and businesses with their energy bills this winter, and for those struggling with the impact of inflation more widely, the Institute added.

Findings demonstrate cost of doing business crisis

As costs rose, businesses reported that input prices grew to their highest rate since the BCM began in 2004. This reflected a backdrop of Covid- and Brexit-related supply-side problems, and a global surge in energy and raw material costs, ICAEW said. Firms in the manufacturing, engineering and construction sector saw the biggest rise in prices. [2]

As input prices rose, businesses hiked selling prices at a record rate, the BCM found. Companies expect the high rate of inflation to continue, affecting input costs, salaries and investment, indicating that the cost of doing business crisis will persist in 2023. [3]

The labour market has become extremely tight. Two-fifths of businesses reported a shortage of non-management skills, a survey high which particularly affected firms in the transport and storage sector. Staff turnover was a pressing issue for 43% of companies, while at 29% the proportion reporting a shortage of management skills was less prominent but growing. [4]

ICAEW questioned whether this tightening – and the cost of living crisis - could contribute to an inflationary cycle, as workers sought jobs with higher wages and firms upped salaries to meet demand and suggested that pay restraint was unrealistic in the current climate.

Meanwhile, regulatory problems and the tax burden – reflecting the level of taxes companies and customers are now facing – were growing issues for 39% and 27%, respectively. The proportion of companies citing the tax burden as a problem was a record high for the survey.

Sales levelling off

Domestic sales increased by 6.4% in the 12 months to Q3, following the gradual removal of Covid restrictions. Sales growth is expected to slow, reflecting the problems businesses face. [5]

Exports growth has been weaker and remained in line with pre-pandemic rates. Brexit-related frictions, such as red tape and transport delays, are a likely explanation for this, while some companies have prioritised domestic sales over exports as a result of the UK’s departure from the Single Market, ICAEW said. [6]

Michael Izza, ICAEW Chief Executive, said:

“It's little surprise that business confidence has plunged back into negative territory amid record cost pressures and intensifying staff and skills problems. The cost of doing business is causing a crisis for firms and this will only get worse in the coming months.

“The UK economy is in transition, and decisions made by the new Prime Minister in their first days and hours in office will dictate the future of our economy for years to come.

“With inflation running at levels not seen for 40 years, ministers must provide targeted support for struggling businesses and households to keep the lights on this winter.”

Suren Thiru, Economics Director for ICAEW, said:

“The latest results suggest that the UK economy is at a perilous turning point as unprecedented inflationary pressures and chronic supply constraints stifle economic activity. Historically, negative readings for business confidence have signalled difficult periods for the UK economy, including recession.

“Record high price pressures suggest that the current inflationary surge will intensify considerably in the coming months. A perfect storm of growing input costs for businesses, eye-watering energy bills and persistent supply constraints means that inflation could peak higher and later than the Bank of England predicts.

“The speed at which these headwinds are suffocating business activity and shattering people’s incomes means that without action, a painful downturn looks inescapable.”

Confidence declines across the country

Business confidence weakened in all UK nations and regions, the survey found, with those in Scotland and Wales the least confident. [7]

Sentiment in London was at 0, the only part of the UK where confidence was not in negative territory.

ENDS

Notes to editors:

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

1. The Business Confidence Index stood at -5 in Q3 2022, significantly lower than its record level of 47.0 in Q3 2021. In Q4 2020, the Index stood at -19, the last time it was in negative territory prior to this quarter.
2. BCM measure of input prices stood at 4.8% in the year to Q3 2022, markedly faster than the previous record high of 4.2% in Q4 2008.
3. BCM measure of selling prices stood at 3.1% in the year to Q3 2022, almost one percentage point faster than the previous record for the survey.
4. 44% of businesses cited the availability of non-management skills as a rising source of difficulty in Q3 2022, while 63% of businesses in the transport and storage sector reported it as a growing challenge. The availability of management skills was a growing concern for 29% of businesses.
5. Domestic sales increased by 6.4% in the 12 months to Q3 2022.
6. Exports grew by 3.1% over the last year.
7. The Business Confidence Index in Scotland and Wales in Q3 2022 stood at -11.8 and -14.4, respectively.
8. The Business Confidence Monitor (BCM) survey began in 2004.
9. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 25 April 2022 and 15 July 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.
10. 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.