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Business confidence declines to pre-pandemic levels

Author: ICAEW Insights

Published: 17 Feb 2022

Business confidence in the UK decreased for a second quarter running, receding to average levels not seen since 2014, in a clear sign that firms are preparing to live with coronavirus, ICAEW survey finds.

ICAEW’s Business Confidence Monitor (BCM), which surveys 1,000 chartered accountants in the UK, found confidence at 27.6 on the quarterly index for Q1 of 2022, significantly below the highest-ever reading of 47 two quarters ago. The report showed that confidence for the quarter has come down to normal pre-pandemic levels, suggesting that companies are looking to the future after an unprecedented two years, ICAEW said.

Companies reported that domestic sales grew by 5.3% in the past year, with such growth unseen since 2007, likely explaining why confidence has remained high. Domestic sales are forecast to remain strong with growth expected in the year ahead, though the rate predicted has slowed compared with the previous quarter.

Export growth has yet to return to pre-pandemic rates, the BCM found, suggesting the recovery has been largely domestic. While this may reflect Brexit-related problems with transport and trade, overall export growth is expected to recover over the coming months. Though fears of the Omicron variant produced weekly fluctuations in sentiment, initial concerns gave way to news suggesting the strain was less of a threat than initially feared, having less impact on the index overall.

Michael Izza, ICAEW Chief Executive, said: “After record-breaking confidence in 2021, it’s unsurprising that the index has fallen as companies look to the future. Nevertheless, confidence remains strong and is returning to the levels we saw before the pandemic. 

“Sales growth at home has boosted businesses, and more growth is expected in the year ahead. However, as firms navigate the coming months, they are reporting record pressures from staff turnover and skills availability, which may hinder further growth.”

Staffing is the fastest growing issue

For the first time since the BCM began in 2004, staff turnover and the availability of non-management skills were reported as the fastest-growing business challenges, highlighting the significant problems companies are having with recruitment. Employee numbers reduced as workers left their jobs during the pandemic, which contributed to these prominent problems, though employment is set to increase by 3.1% year on year, the report said.

“Many manufacturers are really struggling to access new people with new skills and that’s having a knock-on effect on retention as well,” said Rachel Eade, supply chain specialist at BCRRE, University of Birmingham. “We are seeing a fair amount of movement of skills in manufacturing and people are in the driving seat at the moment – they can move jobs for relatively large amounts of money, which leaves companies with a hole to fill.”

Companies also saw input price inflation rise by 3.4%, the highest rate for 14 years, because of growing demand for goods and services as the economy recovered. However, ongoing supply-chain disruptions, transport shortages and higher prices for energy and raw materials are also likely to have contributed to the rise.

“Meaningful grants are needed”

Meanwhile, transport problems were widespread and increasing, while tax concerns and complaints about the availability of government support for business were also on the up. The latter was a particular concern for retail and wholesale businesses that were heavily reliant on business rates relief, which is due to end in April.

Johnathan Dudley, chartered accountant and Head of Manufacturing at Crowe, said: “As a business, you should secure financial war chests and strategise what the business of the future needs to be and plan accordingly.”

He also says that the idea of government support in the form of loans just creates more gearing, reducing the future borrowing power of businesses and increasing their risk profile – “meaningful grants are needed”.

Dudley is also past chair of ICAEW’s Manufacturing Community, which submitted a proposal for a Coronavirus Business Recovery Offset Scheme (CBROS) back in May 2021 to encourage not only survival but innovation through to the other side of the pandemic. He continues to be a member of the Manufacturing Community and also holds the role of chair of the WM Strategy Board.

The proposal would provide 130% enhanced credit against COVID-19 debt (CBILS, BBILS, CLBILS, Time to Pay) as an immediate deduction against amounts owing on COVID-19 debt.

It is proposed to work like the R&D scheme for SMEs at an effective rate using the current corporation tax rate as a base (though the credit rate need not necessarily be tied to the corporation tax rate) of 43.7%, effectively 230% of the original expenditure, at corporation tax rates, currently 19%.

Profits expected to grow

Salaries have also risen in line with pre-pandemic rates and are projected to rise at their sharpest rate for 13 years in the next 12 months. This was partly in response, ICAEW said, to the significant recruitment difficulties faced by businesses, caused by tight labour market conditions and skills shortages.

Employment is expected to rise at record levels next year, with businesses expecting current recruitment and staff retention issues to ease. Profits are expected to grow, supported by productivity gains, a fall in spare capacity and rising prices, as businesses pass on their rising costs to customers.

Izza added: “The government’s plans for levelling up the country could help boost post-pandemic economic recovery, and we hope engagement with the private sector can play a key role in achieving growth. We’d like to see the government use opportunities to make the UK the best-regulated advanced economy, and further position Britain as a global hub for innovation, science and technology.”

Further reading:

Click here for the full report: ICAEW’s UK Business Confidence Monitor Q1 2022 

ICAEW coverage of government’s recent Levelling up White Paper

Read the previous ICAEW quarterly BCM report here

 

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