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Economic Insight

UK Business Confidence Monitor: National

The Q2 Business Confidence Monitor (BCM) shows a further small increase in business confidence, although sentiment did fall away during the quarter, due to concerns around continued economic challenges, notably high inflation and rising interest rates. Confidence remains below its pre-pandemic average.

The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 27 March to 23 June 2023.

Key points

  1. Confidence has improved slightly compared with Q1, but weakened during the quarter, reflecting two increases in interest rates during the survey period, softer growth in sales, and a range of other financial and business challenges.
  2. There is also significant variation in confidence across sectors. Transport is the most confident sector and Property clearly negative, while Retail & Wholesale confidence is borderline negative, and Construction a little better. For those sectors in particular, interest rates are a major factor. 
  3. Domestic sales have slowed further, and companies expect growth to continue around the current rate in the year ahead. Export growth is no longer on a rising trend. 
  4. Input cost inflation is expected to fall sharply, led by Manufacturers. Salary growth is expected to weaken slightly, and businesses forecast a slightly slower rise in staff levels and in selling prices over the coming 12 months. 
  5. Regulations are slightly more prominent as a challenge than customer demand, while several sectors, notably Property, face financial challenges. The tax burden has become a more significant issue, while labour market and transport problems have eased. 
  6. Capital investment growth has slowed and is expected to weaken further, reflecting subdued confidence and many companies operating below capacity. R&D growth has also slowed.


A backdrop of high inflation, interest rate rises, pay disputes and financial pressures

  • Marginally good news on economic growth has been overshadowed during the quarter by disappointingly small reductions in inflation, as cost and price pressures have become more widespread through the economy. Real living standards have been squeezed.
  • As a result of high inflation, and for the second time in a row, the Monetary Policy Committee (MPC) raised interest rates twice during the quarter.
  • Against this background banking conditions have tightened and taxes have risen, while public concern over the state of public services has intensified, with no respite in sight.

Recent months have seen some mildly positive news regarding UK economic growth, with a small 0.1% rise in GDP in the first quarter, a period when it once seemed likely that the UK economy would be moving into recession. And GDP would have been even stronger, were it not for days lost due to continuing industrial disputes, and the extra bank holiday in May to celebrate the King’s coronation. Indeed, May’s GDP showed a slight decline of 0.1% but it was smaller than expected.

However, most attention in the quarter has been focused on inflation. It fell to 8.7% in April, after peaking above 11.1% last October, but its descent has been frustratingly slow, recording 8.7% again in May, but then it dropped further to 7.9% in June. Initially driven by high raw energy and commodity costs, inflation has come to be increasingly the result of more generalised wage and price rises across the economy, and not least in the service sector. Real household incomes have been squeezed, and the impact of that has been compounded by higher interest rates. In May the MPC increased these by 0.25 percentage points, to 4.5%. A month later, in response to higher than expected inflation figures, it imposed a further and larger rise to 5%.

Rising interest rates have been occurring against a backdrop of more restrictive credit conditions, resulting from global banking system strains in the US and Europe, and rising taxes. Both have directly affected households as well as companies. The tax increases reflect the government’s desire to claw back some of the costs from measures taken to alleviate the pandemic and higher energy prices, plus a need to undo the damage to its reputation for fiscal competence caused by the brief Liz Truss administration. Meanwhile, there has been mounting popular concern over the state of public services, against a background of government plans to make significant reductions in spending over coming years. These challenges have been compounded by the industrial disputes, many of them in the public sector. Some of those have been resolved, but others have not.

Confidence overall

Business Confidence up, only slightly, but falls away during the quarter

  • Business confidence continues to recover, but it is still slightly below the pre-pandemic historical average, and weekly data suggest that it declined within the quarter.
  • Domestic sales have continued to slow, although growth is expected to stabilise in the year ahead. Export sales growth has also eased and is no longer on an upward trend.
  • The Construction, Property and Retail & Wholesale sectors all show particularly weak confidence and domestic sales, reflecting their direct exposure to higher interest rates. They are hoping that export opportunities will provide some protection.

Business confidence recovered further in Q2 2023, but at 6.1 it remains below the 2010-2019 average of 7.2. Furthermore, weekly data suggest that confidence may have been ebbing away during the course of the quarter, reflecting a backdrop of disappointing inflation figures, political challenges for the government, and rising interest rates. Sectors particularly exposed to higher interest rates show the weakest confidence: Construction sector confidence is very low, while the Property sector remains firmly rooted in negative territory, and confidence in the Retail & Wholesale sector turned mildly negative in the quarter.

Domestic sales growth has continued to slow, standing at 4.9%, the lowest figure since Q3 2021, when sales expanded rapidly following the removal of Covid restrictions. However, companies expect a marginally faster rate of increase, at 5.2% over the coming year. Construction companies have experienced the weakest domestic sales over the last 12 months, and they expect the year ahead to remain weak, reflecting their very low confidence. Domestic sales in Property have also been subdued, but companies are a little more optimistic about the next 12 months, with expectations marginally ahead of the average for all sectors. However, Manufacturing companies expect their domestic sales to slow markedly, as their sales over the past year have possibly been boosted by a recovery from the pandemic and then global supply chain difficulties.

Exports growth has abated and is no longer on an upward trend, falling to 3.3% in Q2 2023 from 4.1% in Q1. Companies generally expect exports to remain subdued, with weaker growth than for domestic sales. Exceptions include Construction, Retail & Wholesale and Property, which expect stronger export sales over the next 12 months than experienced over the last year. These sectors are normally mainly focused on the domestic market, but are particularly affected by rising interest rates, and they may be responding to weak domestic sales by looking for export opportunities.

Business challenges

Tax challenges rising but eclipsed by customer demand challenges and regulatory requirements

  • The most widespread challenge faced by businesses is regulations, closely followed by customer demand, while the tax burden has increased in prominence, as the rate of corporation tax rose to 25% at the start of the financial year.
  • Regulatory issues are mostly non-specific concerning the general weight of regulation and scrutiny. But specific topics do arise, particularly in certain sectors such as Finance, Property, Manufacturing and Retail & Wholesale.
  • Labour market and transport challenges continue to recede, as the pandemic and its aftermath both fade, but also reflecting slower sales growth.

Customer demand continues to be a major challenge for businesses (34% report it as a rising concern), reflecting slowing sales, the uncertain economic background, persistent pressure from inflation and rising interest rates. Less prominent, but rising quite notably, is the number of businesses that cite the tax burden as a growing challenge (29%). The rise in corporation tax to 25% came into effect in April. Companies also cite bank charges as a growing challenge, particularly those in the Property sector, which is also being hit particularly hard by problems with access to capital.

However, regulatory requirements are, by a small margin, the most prominent challenge (37%), having risen slightly from 2023 Q1 (35%). Concerns are mostly general in nature, reflecting increased scrutiny and reporting requirements, and a perceived greater administrative burden, which relates to existing as well as new regulations. But specific topics also arise, particularly in certain sectors. For example, a variety of issues to do with Brexit are particularly common among Manufacturers and Retailers & Wholesalers. Similarly, environmental, social and governance (ESG) issues are particularly prevalent in the Property sector. Other issues specifically cited include the ‘plastic tax’, and health and safety requirements, while the Banking & Finance sector is particularly affected by Financial Conduct Authority requirements.

On the positive side, labour market issues, including the availability of non-management skills and management skills, and staff turnover, have continued to ease, as have transport problems. This is mainly because the pandemic and its difficult aftermath are both fading into the background, although slower sales growth will also be making these matters less pressing.


Input price and selling price inflation at record highs but expected to slow

  • Input prices are rising at the fastest rate since the survey began in 2004. But businesses expect input price inflation to ease considerably over the next 12 months, reflecting what has happened in energy and commodity markets.
  • Selling prices also rose at their fastest ever rate this quarter, although at a slower pace than the increase in input prices.
  • Manufacturers and Retail & Wholesalers both expect sharp moderations in selling prices over the next 12 months, whereas companies in Business Services and in IT & Communications expect little moderation.

Input price inflation remains elevated, at 6.2%, year-on-year, in Q2 2023: a similar rate to the previous quarter and the fastest since the survey began in 2004. This is the fifth consecutive quarter in which input prices have risen rapidly. High energy and raw material costs are the main drivers behind this, along with increased costs for services, such as transport, and IT & communications. Brexit may also be contributing to higher business costs, with factors such as increased bureaucracy and border delays impacting many companies.

However, businesses do expect input cost inflation to ease considerably over the year ahead, averaging 3.6%. This reflects declines already seen in many energy and raw material prices, or simply a levelling off, making year-on-year comparisons less challenging. It is especially true for Manufacturers, which saw input costs rise the most in the year to Q2 2023, but which also expect costs to slow the most, in the year ahead. The opposite pattern exists in IT & Communications, Finance and Business Services. Input prices in these service sectors generally rose by less than in Manufacturing, and so they are likely to see less of a correction in input prices.

Selling prices have also continued to rise, but at a slower pace than for input prices, with an increase of 4.2% in the year to Q2 2023 – the fastest since the survey began in 2004. The expectation is that these prices will climb at a more modest rate (2.7%) in the next 12 months, reflecting the slowdown in cost inflation. Manufacturers’ selling prices rose the most in the 12 months to Q2 2023, followed by Retail & Wholesalers’ prices. Both expect sharp moderations in the next 12 months, whereas companies in Business Services and especially IT & Communications are not expecting to slow the rate of increase in their selling prices, probably because their costs are more determined by salaries than in the other sectors.


Slightly weaker salary growth expected in the year ahead, as inflation and the labour market slow

  • Salary growth gained momentum in Q2 2023 and is now at a record high rate, unsurprising given economy-wide inflation trends and rising employment.
  • Businesses expect that pattern to ease in the year ahead, but only slightly.
  • Weaker outlook for employment growth helps to explain why labour market challenges, while still important issues, are becoming less widespread across businesses.

The cost of labour continues to increase for businesses. In the year to Q2 2023, average total salaries increased by 4.4%. This is the fastest rate of increase captured by the survey since it began, mirroring the pattern seen in input and selling price inflation. The IT & Communications sector has seen the largest increases, reflecting its growing need for highly skilled people.

The pace of salary growth is expected to weaken over the next 12 months, but only slightly, with inflation continuing to push up employers’ wage expectations, and increases in staff levels also supporting pay demands. Employment growth has been on a downward trend since hitting its historical high of 3.5% a year ago. It averaged 2.7% in the year to Q2 2023, reflecting rising sales in the period, with further staff level rises expected in the year ahead, albeit at a slower rate. A consequence is that fewer companies report rising difficulties with staff turnover and with obtaining skilled staff.  


Capital investment expected to soften further in the year ahead, reflecting fragile business confidence

  • Profits continue to rise, but at a slower rate than in the previous quarter, as businesses face several challenges including higher input and salary costs.
  • Businesses' profit expectations over the next year are more positive, however, helped by slower growth in input costs.
  • Capital investment growth has been slowing, reflecting cost pressures, fragile confidence and, for an increasing number of companies, spare capacity.
  • A further slowdown in capital investment is expected. In contrast, Research & Development (R&D) expenditure should hold up, but the growth in this has been at a particularly low rate.

Profits growth is still positive, even though impacted by high input and salary costs. At 3.0% in the year to Q2 2023 it was in familiar pre-pandemic territory, after a period of significant distortions. And businesses expect modest improvements in the rate of profits growth over the next 12 months (4.9%), reflecting their expectations that input price inflation will gradually moderate.

Growth in capital investment spending has, however, been on a downward trend over the last year, weakened by slowdowns in profits and domestic sales, and especially by a lack of clear upward momentum in business confidence. Alongside this, there has also been an upward trend in the proportion of businesses operating below capacity, which clearly means that fewer businesses need to invest to meet existing or future demand.

Looking ahead, businesses expect to further moderate their increase in capital spending, with growth averaging 1.7% in the year to Q2 2024 ‒ down from 2.5% reported in Q2 2023. Businesses are not, however, expecting to see further cuts in their R&D budgets. However, at 1.6%, the growth in these is far from rapid.

Confidence by sector

Business sentiment remains very weak in Construction, Retail and Wholesale, and especially Property

  • Business sentiment is strongest in the Transport & Storage sector, as it shakes off at least some of its recent difficulties, with Energy, Water & Mining in a similar situation.
  • In contrast, confidence is negative in Property and is borderline for Retail & Wholesale and weak in Construction. These sectors are directly impacted by high interest rates, but also face various other related challenges.
  • The sales outlook for the year ahead is weakest in Manufacturing, particularly for domestic markets, while companies in IT & Communications anticipate the fastest rises in domestic and export sales.

Business confidence is positive, not just overall, but for most sectors. Businesses in Transport & Storage are the most optimistic, with their Business Confidence Index rising to +21.8, followed closely by Energy, Water & Mining at +16.5. The former has benefitted from improvements in the global availability of ships, and increased road haulage capacity, as well as from rising air travel demand, while the latter has seen an easing in the global energy crisis.

The Construction sector is much less optimistic, although it is at least positive (+3.8), having been strongly negative (-39.5) in Q4 2022, However, sentiment is very negative in Property (-9.4) and borderline for Retail & Wholesale (-1.0). All of these sectors are directly impacted by high interest rates, but especially the Property sector which faces multiple worries: high mortgage rates, cost of living pressures and economic uncertainty all undermining the housing market, while the office market is hit by the continuation of working from home, and the retail market by the rise of internet shopping.

Confidence issues in Property are evidenced by its relatively weak performance over the last 12 months, with businesses in the sector reporting the second lowest domestic sales growth of all sectors. However, it was the Construction sector that had the weakest domestic sales growth in the year to Q2 2023 and, together with Retail & Wholesale, these sectors are also grappling with the biggest customer demand problems. Bank charges and access to capital are also especially challenging for Property companies.

A growing number of businesses cite the tax burden as a growing challenge although this has fallen in some sectors in the latest quarter, most notably in Energy, Water & Mining as concerns over the Energy Profits Levy and the “windfall tax” appear to have eased. Tax concern is at its highest level since the survey began in many other sectors, and is particularly elevated in Property and Construction.

Manufacturing expects to see domestic sales slow markedly over the next year and the same is true for Energy, Water & Mining, albeit relative to a much higher rate of growth in the past 12 months. Companies in IT & Communications anticipate the fastest rate of domestic and export sales growth over the next year.

Confidence by region and nation

Confidence varies across the regions with most but not all in positive territory

  • The latest Business Confidence Index shows that companies in South East, North West and Wales are most optimistic about economic prospects. Companies in Yorkshire & Humber and London are the most downbeat, with the latter probably affected by its large Property sector.
  • In terms of domestic sales, the South East has the strongest growth expectations over the next 12 months, and London and Scotland the weakest. Businesses in the capital are finding marketplace competition particularly challenging.
  • Businesses in most regions and nations anticipate export sales to improve in the year ahead but some manufacturing regions (Yorkshire & Humber, the North East) are among the weakest.

Business confidence has increased across all UK nations and most regions, with particularly high confidence reported by businesses in the South East (+13.7), North West (+13.5) and Wales (+12.4). However, sentiment slipped into negative territory in Q2 2023 in Yorkshire & Humber (-0.6), having been higher than in most other regions in the previous quarter. Meanwhile, confidence in London remains weak (-1.7), probably impacted by the ailing Property sector, which is particularly important to the capital.

The South East and East of England have the strongest domestic sales growth expectations for the coming year, both anticipating markedly stronger performance than they have experienced over the last 12 months. However, several regions and nations forecast only slow growth in domestic sales next year, with businesses in Scotland and London the least positive in that regard.

In terms of exports growth, businesses in most regions and nations foresee export sales picking up next year. Within that, some of the weakest expectations over the next 12 months are to be found in manufacturing regions, including Yorkshire & Humber and the North East. Businesses in London, the East of England and Wales are the most positive, projecting that export sales will pick up significantly next year.

Access to capital remains a more significant challenge for London than other regions and trended upwards slightly in the latest quarter. This, too, probably reflects the importance of the Property sector in London. However, while transport problems have eased significantly in London, perhaps because of fewer strikes, businesses are finding the marketplace more competitive than in previous quarters, with expanding into new areas a growing challenge. Customer demand is the main challenge for companies in the capital.

Confidence by business size

Confidence is negative for foreign-owned companies and strongest for large privately-owned businesses

  • The Business Confidence Index is positive for all companies except for those quoted outside the UK.
  • The Business Confidence Index for exporting companies is still positive, despite the strength of sterling in recent months, while non-exporters have now made it into positive territory.
  • The same is true for large unquoted businesses, which are more positive than quoted companies. They may feel less exposed to equity market risks.

Most company types have seen the Business Confidence Index improve, compared to the previous quarter, and are in positive territory. Companies listed outside the UK are the exception, with the Business Confidence Index marginally in negative territory. This may reflect external perceptions of the state of the UK economy, and the fact that domestic and export sales over the last 12 months have been weaker for them than for UK-based companies.

Exporters have been confident for two quarters in a row. The same is true for UK listed companies, and many of these are exporters, or derive a lot of their profits from overseas operations.

Non-exporters have made it into positive territory, having been marginally negative in Q1 2023. The same is even more true for large unquoted businesses, which are more positive than quoted companies, possibly because they are less exposed to possible equity market risks and these businesses had notably higher domestic and exports sales over the past 12 months while being the most optimistic about export sales for the year ahead.

There are some differences in the challenges businesses face across different company types, and SMEs have the highest proportion (34%) of businesses facing growing concerns about the tax burden, while large private companies have greater concerns about staff turnover and availability of non-management skills than other business types.

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