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Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse

Q2 2022: The latest Business Confidence Monitor (BCM) shows business confidence weakening again. As economic conditions tighten, businesses are facing significant challenges, particularly on the supply side, which could hinder future growth. This is despite companies experiencing strong sales growth as they continue to recover from the pandemic.

The 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 interviewing is continuous, the latest findings are based on the period between 17 January and 21 April 2022.

Key points

  1. The Business Confidence Index continues to fall from its near-record level of Q4 2021. It is now broadly within the pre-Covid range as concerns grow around the economic outlook.
  2. Companies have experienced strong sales as demand picked up after the lifting of Covid restrictions, with domestic sales leading exports, but the latter starting to catch up.
  3. Businesses are well aware of challenges and risks that could alter their current outlook, with particular concerns over staff turnover and skills availability, alongside transport problems and rising issues with respect to taxes and government support.
  4. In addition, continued input price inflation and salary costs rises are adding further pressure on businesses and are expected to continue doing so. Many have already increased their prices and they anticipate further rise ahead.
  5. Confidence varies markedly by sector. It is highest in IT & Communications and Transport & Storage, and weakest in Construction, Manufacturing, and Energy. 
  6. Confidence has eased across most of the UK, with Scotland and Northern England among the least confident.

GDP

  • Increased global uncertainties, including first Omicron and now the Russian war against Ukraine, are damaging economic growth and driving up global prices, with adverse impacts on consumer prices in the UK.
  • Higher than expected inflation is now set to weaken consumer spending growth through much of 2022 and is also causing interest rates to climb.
  • The government continues to implement a marked tightening in fiscal policy, with employers’ National Insurance contributions rising and income tax allowances and thresholds frozen.

The beginning of 2022 was marked by the surge in the Omicron variant of COVID-19, followed by new anxieties due to the Russian attack on Ukraine, which on top of the terrible human cost has caused damage to global supply chains and a further ratcheting-up of commodity prices. And although Omicron has faded as a domestic economic issue, high infection rates and severe lockdowns in some Chinese cities are undermining economic growth there. The US economy also began 2022 with weaker economic growth than at the end of 2021, but the labour market is very tight, and the Federal Reserve has raised interest rates and signaled that more is to come.

In the UK too, interest rates have risen, with more expected in response to inflationary pressures. A combination of rising petrol prices, upward pressure on global goods prices from supply-chain bottlenecks, and April’s 54% rise in the energy price cap, all provide immediate problems, while Russia’s war against Ukraine will probably keep petrol, food and gas prices higher for longer. That is likely to hurt consumer spending through much of 2022, since although average earnings are rising, they are not keeping pace with prices. 

In addition, household incomes will come under pressure from tighter fiscal policy, as the government unwinds the exceptional support that it provided in the early stages of the pandemic. Employees’ National Insurance contributions rose by 1.25ppts in early April, with the increase in the threshold for paying NICs announced in the Spring Statement only partially mitigating the impact. The government is also imposing what it says will be a four-year freeze on income tax allowances and thresholds. High inflation means that the impact of this will be tougher than the policy was originally intended to be.

Confidence overall

  • The Business Confidence Index has again fallen as the economic outlook worsens. It is now back within the range that typically prevailed before the pandemic. 
  • Domestic sales are, however, markedly higher in the current quarter than in Q2 2021 when the UK was under the Covid restrictions and are expected to continue rising at a similar rate. Export sales growth is also improving.
  • Confidence has fallen in most sectors, however there are marked variations. It is highest in the IT & Communications sector, and Transport & Storage, and weakest in Construction and Manufacturing.

The Business Confidence Index stands at 18.6 in Q2 2022, only slightly higher than the average for the decade before the COVID-19 pandemic. Confidence has fallen for the last three quarters, from its peak of 47.0 in Q3 2021, as concerns around tightening of the economy grow.

Despite a more cautious outlook, companies have increased their domestic sales by 6.4% since Q2 2021, after it contracted by -1.7% in Q2 2021. Following the lifting of Covid restrictions earlier in the year and probably reflecting expectations of strong pent-up demand they anticipate similar levels of growth ahead. Export sales grew at more moderate pace by 2.9% but it is expected to improve, again probably reflecting later removal of the Covid restrictions in our key export markets.

There are marked differences between sectors. The two with the strongest domestic sales expectations—Transport & Storage and IT & Communications—are also more optimistic about general business conditions compared with other sectors. Confidence is weakest in the Construction sector, followed by Manufacturing, possibly reflecting supply chain issues and rising input costs particularly affecting these two sectors.

Business challenges

  • Staff turnover and availability of non-management skills are once again the most widely cited growing challenges facing businesses, while problems with management skills availability are also growing. 
  • Transport worries have eased a little but are still historically high. Both tax concerns and government support continue to climb, whereas in the past they have been quite minor issues.
  • Transport problems are particularly affecting Manufacturers and Retailers, and increasingly troubling the Construction sector. That sector is also affected by tax concerns, as are Banking & Insurance companies, which also are particularly troubled by marketplace competition.

While sales continue to grow, companies are well aware that several challenges could alter the outlook. The most widespread of these are growing difficulties with staff turnover and the availability of non-management skills (and to a lesser extent management skills). Many people left the labour market during the pandemic and, for whatever reason, are not back looking for work at a time when most companies are facing sharp rises in order books. Staff turnover is a particularly pressing issue in the IT & Communications and Retail & Wholesale sectors, although for non-management skills availability those two are just pipped by the Construction and Energy Water & Mining sectors. 

The tax burden is also becoming a more widespread challenge, although on a smaller scale and it probably partly reflecting the April rise in employers’ National Insurance contributions. Government support is also a more common issue than a year ago, although the rise is from a low base. 

More positively, transport issues, which have been a major concern during the pandemic recovery period, are easing somewhat. They remain most widespread in the Manufacturing and Retail & Wholesale sectors, and they are increasingly troubling the Construction sector. All of these rely heavily on just-in-time delivery, but are almost certainly among the worst hit by any failures in global supply chains. The Banking & Finance sector has particular worries over tax and marketplace competition, with the latter possibly reflecting the growth of non-banking digital payment systems.

Prices

  • Input price inflation continues to climb, with no slowdown expected. The expected rise over the next year, if it occurs, will be the joint fastest since the survey began in 2004.
  • Transport & Storage and Construction are currently facing strong input cost pressures. Energy, Water & Mining companies expect the sharpest rise in the year ahead. 
  • Higher costs are feeding through to selling prices. These have increased at the fastest rate in the survey’s history. Another record rise is expected in the year to Q2 2023.

Input price inflation has climbed to its highest rate since the end of 2008, at 3.8% year-on-year. In recent months costs pressures have been amplified by Russia’s invasion of Ukraine, with energy and many commodity prices rising sharply. Companies do not expect these pressures to dissipate in the year ahead. Instead, they expect an even stronger increase, of 4.2%. If this happens it will be the joint sharpest rise, along with Q4 2008, since the survey began in 2004. 

Companies in Transport & Storage and Construction have seen the fastest rates of input price inflation and expect that to continue over the year ahead. But the biggest increase is forecast in Energy, Water & Mining. Businesses are not simply absorbing these higher costs. Selling prices charged to customers are up by 2.3%, year-on-year, in Q2 2022, the sharpest increase since the survey began nearly two decades ago. Further still, businesses expect another record increase in the coming year of 2.8%. Companies in Energy, Water & Mining expect the fastest rises in selling prices. 

Despite rising costs, the combination of higher selling prices and increased sales volumes is helping to lift profits. Growth of 6.0% in the year to Q2 2022 marked the sharpest increase in nearly 15 years, following its decline by -2.5 in Q2 2021. And businesses expect a very similar rate of growth in the 12 months ahead. The rising proportion of businesses reporting higher productivity over the past year is also a factor that is likely to be alleviating any pressure in company margins. 

Employment

  • Salary growth is at its highest rate in over a decade, with even sharper increases planned in the year ahead. 
  • Widespread challenges with staff turnover and the availability of skills, along with higher inflation, help to explain why salaries are increasing.
  • Employment growth has strengthened. And employers anticipate further gains over the next 12 months.  

Labour costs are increasing sharply. In the year to Q2 2022 average total salaries rose 2.7%, the fastest rate of increase in over a decade. And businesses intend to raise salaries by a further 3.2% over the next 12 months. 

This upward pressure on salaries is largely driven by widespread difficulties in the recruitment of labour. Staff turnover again stands as the most prominent growing challenge for businesses, with the availability of non-management skills not far behind. The proportion of companies having problems with the former is at its highest rate (43%) since the survey began. 

A major driver behind these is increasing demand for labour. Annual employment growth has picked up in Q2 2022, standing at 2.7%. And a stronger increase of 3.2% is expected for the year ahead. That does at least suggest that companies do not expect current labour market frictions to impede future employment plans.  

Salary growth has been strongest in Energy, Water & Mining. The annual rise of 3.9% is the highest seen in the sector for over a decade, while the proportions of companies adversely affected by the availability of non-management and management skills, and staff turnover, have all risen to record rates. 

Investment

  • The proportion of businesses operating below capacity is well below historical norms for the UK, increasing the need for companies to invest.
  • As a result, capital investment growth is at a near-record pace, with further rises planned for the year ahead. However, Research & Development (R&D) growth is more muted.
  • Capital investment growth is expected to be fastest in Energy, Water & Mining, while IT & Communications businesses have particularly strong R&D plans.

Another factor adding to the pressures in the UK economy is tight capacity. The proportion of companies operating below capacity (40%) is only marginally above the record low of last quarter. The current strength of sales, alongside a scaling back of resources during the pandemic, are together impacting on companies, making it harder for many to respond to rising demand, and probably contributing to inflationary pressures.

These capacity constraints help to explain why companies are increasing their capital investment. Spending on capital assets increased in the year to Q2 2022 by 3.4%, the fastest rate since Q2 2005. And a further rise of 2.7% is planned for the next year. However, spending on Research & Development (R&D) has been more muted, with year-on-year growth in Q2 2022 (2.1%) only just returning to pre-pandemic rates. A similar rise is expected for the 12 months ahead. 

Across sectors, capital investment plans are strongest in the Energy, Water & Mining and Retail & Wholesale sectors. The former is under pressure to decarbonise and adopt greener technologies. The latter is adjusting to a shift towards online retailing, which is also why it is planning a sharp increase in spending on R&D after two weak years. For similar reasons the IT & Communications sector has the strongest outlook for R&D spending. 

   

Confidence by sector

  • There are significant variations in sentiment, closely associated with differences in sales growth. The Business Confidence Index is highest in IT & Communications, Transport & Storage, and Business Services. The Construction, Manufacturing & Engineering, and Energy, Water & Mining sectors sit at the bottom end of the range.
  • Construction, Transport & Storage, and Energy, Water & Mining are particularly troubled by skill availability challenges. 
  • For the last of these, problems with government support and late payments are also more widespread than in any other sector, reflecting the impact of rising costs and of higher prices for customers.

While confidence has fallen across most sectors, there are marked differences between them. Companies in IT & Communications, Transport & Storage, and Business Services are more confident in Q2 2022 compared to the other sectors. However, sitting at the lower end of the rankings are companies in Construction, Manufacturing & Engineering, and Energy, where sentiment has fallen significantly from recent levels.  

These variations are closely linked to marked differences in sales performance. IT & Communications, Transport & Storage, and Business Services all achieved the fastest rates of domestic sales growth over the past year and have the strongest domestic sales outlooks for the 12 months to Q2 2023. Companies in Manufacturing & Engineering, Energy, Water & Mining, and Construction, along with Property companies, had the weakest domestic sales growth. Export growth has also been particularly slow in the Manufacturing & Engineering sector.  

Another factor weighing down sentiment and sales growth in Energy, Water & Mining, Construction, and Manufacturing & Engineering is faster input price inflation, compared with other sectors. In addition, the availability of non-management skills is particularly challenging for Construction, and Energy, Water & Mining, as well as the Transport & Storage sector. The weaker sentiment in the Construction sector may also be linked to the high proportion of companies being increasingly challenged by the tax burden, possibly in response to the recent introduction of a new building safety levy. And the lower Confidence Index reading for Energy, Water & Mining could also be associated with a marked increase in the percentage of companies challenged by government support. Many energy suppliers have faced pressures as a result of a sharp rise in wholesale energy costs—although higher selling prices may help to explain why late payments have become a more prominent issue, despite this challenge trending downwards nationally. 

Confidence by region and nation

  • Business confidence has weakened across most nations and regions. The Business Confidence Index is lowest in Scotland, Northern England, and Yorkshire & Humber, and highest in the West and East Midlands. It has risen in the latter, and also in the South West.
  • The outlook for domestic sales is strongest in Scotland and the West Midlands. The latter also expects export growth to outpace all other UK nations and regions. 
  • Problems associated with government support and the availability of management skills are more widely cited in Scotland than elsewhere, while competition in the marketplace is a particularly widespread issue in the Banking, Finance & Insurance sector, and hence in London.

The Business Confidence Index has weakened across most UK nations and regions in the year to Q2 2022. Businesses in the West and East Midlands stand at the upper end of the confidence spectrum. Companies in Scotland, Northern England and Yorkshire & Humber are, on balance, the least confident. That said, Scottish companies, along with those in the West Midlands, have stronger expectations for domestic sales growth over the year ahead than those in other parts of the UK. Export growth is also expected to be faster in the West Midlands. 

The weakness in Scotland’s overall business sentiment may partly relate to some key challenges coming to the fore. The availability of management skills and government support are now each more widespread growing challenges in Scotland than at any point since the survey began in 2004 and are currently also more prominent issues there than elsewhere in the UK. 

London has been especially challenged by issues surrounding marketplace competition. This issue has been particularly widespread in Banking, Finance & Insurance, a sector that has a large presence in the capital. Transport problems are more widespread in the West Midlands than other parts of the UK, although this challenge has eased in Q2 2022 after surging to record rates in recent quarters. 

Confidence by business size

  • The easing of business confidence is apparent across all types of companies, but most markedly among companies that are listed outside of the UK. 
  • Underlying that, differences in sales performance between company types are minimal, except that those listed outside of the UK have the weakest outlook for both domestic sales and exports over the next 12 months.
  • Government support remains a widespread challenge for Small and Medium Sized Enterprises (SMEs), while the tax burden is most pressing for non-UK listed companies. Transport problems remain elevated for exporters.

The general pattern of business confidence falling from the highs of recent quarters applies across all types of companies, by size, ownership and whether they export or not. However, the decline is especially marked for businesses listed outside of the UK. Companies that export continue to be, on balance, marginally more confident than those that do not. 

Generally, there are also only small variations in sales performance across different company types, although SMEs anticipate the fastest rate of domestic sales growth, while UK listed companies have the strongest projections for exports. Both domestic sales and exports are expected to grow most slowly for businesses that are listed outside of the UK, probably explaining their weaker confidence. 

Businesses listed outside of the UK are also particularly challenged by tax issues. Government support is most widely cited as a growing issue among SMEs, while transport problems continue to weigh more heavily on exporters than non-exporters. And while this challenge has eased from the highs of recent quarters for exporters, it remains well above historical norms. Ongoing delays at ports, as well as staff shortages, are probable factors keeping this challenge elevated. 

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Using BCM data

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