Businesses remain concerned over future sales, high inflation and rising interest rates, according to ICAEW’s most recent Business Confidence Monitor (BCM), prompting ICAEW to call on the government to support and sustain this rise in confidence with plans for long-term economic growth.
Confidence in the first quarter of 2023 rose to 2.5, up from -23.4 in the previous quarter, but still sits below the historic average of 4.9 for this time of the year, according to the survey of 1,000 chartered accountants in the UK.
Michael Izza, ICAEW Chief Executive, says that after an uncertain year it was encouraging to see business confidence return to positive territory. However, he warns that there is still plenty for companies to be cautious about as they grapple with high inflation, rising interest rates and slowing sales: “While financial and economic challenges have eased slightly, they are still having an impact on specific sectors. Customer demand, meanwhile, remains a big problem for businesses across the board.”
Which sectors are the least confident?
Construction and property companies were the least optimistic, with negative readings on the index. Organisations in these sectors were also most likely to be impacted by financial challenges, including rising interest rates and limited access to capital. The construction sector was particularly hard-hit, reporting the most widespread problems with customer demand.
However, confidence across all other sectors returned to positive territory, with businesses in manufacturing and engineering, and energy, water and mining being the most confident.
One of the greatest challenges facing businesses was customer demand, amid the continued cost-of-living squeeze. ICAEW believes an ambitious plan from government is needed to build on the optimism and boost business confidence. “With confidence still fragile,” Izza says, “the government must fix the fundamental problems with the UK economy with a plan to deliver long-term economic growth by injecting resilience and stability into the UK.”
Suren Thiru, Economies Director at ICAEW, says the rally in business confidence points to a positive first quarter for the economy as the drag on activity from soaring inflation and political uncertainty eased. “However,” he adds, “with confidence levels still significantly below the historic average as subdued customer demand, high energy costs and rising interest rates continue to hammer firms, there is little to cheer in the latest figures.
“The notable drop in expectations over future selling prices and stabilising salaries suggests that inflation should fall quickly and gives the Bank of England scope to keep interest rates on hold.
“Slowing domestic sales growth and continued squeeze on investment and labour supply points to a worryingly fragile economy, which leaves us more exposed to future shocks, including a renewed surge in energy costs.”
Input prices peak after record year
Businesses expect input price inflation to soften in the year ahead, the BCM found, following four consecutive quarters of record increases that peaked in this quarter. High energy costs, supply-chain disruptions, and Brexit trade barriers were possible reasons for the record rises, but energy prices are likely to return to pre-Ukraine war levels, so costs should ease.
Selling-price inflation hit another record high in the first quarter but is expected to ease in the year ahead to its lowest level since Q1 2022, as concerns grow over customer demand. Firms also expect salary growth to stabilise over the next 12 months.
Staff shortages remain significant despite easing in Q1
One in five companies said they were increasingly troubled by the lack of availability of management skills, while one in three cited issues with the availability of non-management skills. Staff turnover was a problem for a third of businesses.
Meanwhile, domestic sales growth slowed to its lowest level since Q3 2021, with a further easing expected in the year ahead. Exports rose at a slightly slower rate than domestic sales, partly due to Brexit, with the rate of growth for exports stable across recent quarters and unlikely to slow in the year ahead, possibly due to a weaker exchange rate.
As profits and domestic sales growth slowed, capital investment rose by 2.4%, down from the 3.4% rise a year ago. Looking ahead, businesses plan an increase of just 1.8%, which would be among the slowest rises in a decade, excluding the declines during the pandemic.
While business confidence recovered across most UK nations and regions in Q1, sentiment was highest in Yorkshire and the Humber, and weakest in London.
- For the complete picture of sentiment tracked by ICAEW’s BCM – one of the largest and most comprehensive quarterly surveys of UK business activity – visit www.icaew.com/bcm.
- Read ICAEW’s previous BCM for Q1 2023: UK business confidence crashes to 13-year low
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