The latest survey of 1,000 chartered accountants by ICAEW’s Business Confidence Monitor (BCM) found optimism at 47 out of 100 on the quarterly index, its highest level since the survey was launched in 2004 and surpassing the previous record set in the last quarter. 

The optimism was shared by businesses of all sizes across all sectors, nations and regions in the UK. However, the survey has also revealed newly surfaced labour market problems that businesses could see growing in difficulty over the next couple of months.

The record reading is a likely reflection of the expectation of strong sales growth in the year ahead, especially in the domestic market, where a record rise of 7.4% is predicted over the coming 12 months. Companies also expect a sharp boost in export sales, which will rebound to pre-pandemic rates of increase.

Michael Izza, ICAEW Chief Executive, said: "Companies are clearly benefiting from rising customer demand as the economy reopens and life begins to return to normal. The high level of optimism is unsurprising, but it remains vulnerable to a possible resurgence of COVID-19 as we head into the autumn.”

He continued: “While confidence is high across all sectors, with companies reporting record expectations for domestic sales growth, they also told us they face challenges from skills shortages, wage increases and rising costs.”

However, the likelihood of confidence remaining positive is highly dependent on the COVID-19 situation not deteriorating further, ICAEW said. Decisions on interest rates and the winding down of coronavirus support, such as the government’s furlough scheme, could also have an impact on future business sentiment. Office for National Statistics figures published last week showed that Britain’s economy grew 4.8% between April and June, below the 5% that the Bank of England had forecast.

Businesses face different challenges as economy rebounds

Companies have faced growing issues with the labour market as the economy unlocked. Staff turnover was a growing challenge for 23% of businesses in Q3 2021, compared with just 12% in the previous quarter, while there has also been a sharp rise in the number of firms struggling to find skilled staff.

“In the past couple of months we have seen an increase in staff turnover as the restrictions and risks of COVID-19 are reduced, and businesses are setting out their business plans for recovery, which invariably include sustainability,” said Jo Muncaster, Project Finance Lead at City Science. She is also Chair of ICAEW’s South, South West & Wales Regional Sustainability Group, and a member of ICAEW’s Business Committee.

Meanwhile, transport problems have become more widespread, particularly for manufacturers. However, late payments have diminished as a growing concern as companies have rebuilt their finances.

Input costs and prices rising, but not out of control

As the economy expands, businesses expect costs and prices to rise, especially where demand has returned but supply chains have been constrained. This is already happening both domestically and globally, with increases in prices for raw materials and fuel, ICAEW found. Input prices increased in Q3 and are expected to rise further over the coming year. As a result, businesses have put up their selling prices, which they expect to increase by 1.4% in the next 12 months.

Muncaster says that her company has not directly been affected by salary inflation yet, but “given the high demand for a small pool of skills, I suspect this is something that will soon materialise”. 

Businesses plan more investment

Spare capacity has fallen to its lowest level for five years, at 46%, reflecting the strength in demand and companies withdrawing unused capacity. Profits, meanwhile, were slightly down on a year ago, but companies expect them to rise substantially in the year ahead. As a result of more optimistic sales projections, companies anticipate spending more on capital equipment, and research and development, over the next 12 months.

Widespread optimism across most regions, led by London and West Midlands

Confidence has risen to record levels in most of the UK, the report found, with the West Midlands and London leading the way. Businesses in the capital are also planning to increase staffing levels at their fastest rate in more than a decade. Meanwhile, confidence in the East Midlands has rebounded strongly after the region’s businesses particularly suffered during the pandemic. However, firms in the north of England have become increasingly challenged by staff turnover and the availability of non-management skills.

“This is a crucial stage for the economy,” Izza added. “Despite having to cope with the winding down of government financial support and possible interest rate rises, businesses are definitely bouncing back, but finances are fragile and any additional costs could threaten the recovery.”

Click here for the full report: ICAEW’s UK Business Confidence Monitor Q3 2021.