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ICAEW Business Confidence Monitor (BCM): London

Q2 2021: London’s Business Confidence Index climbs to record level

  • Falls in domestic sales and exports in London have been cushioned by the resiliency of the IT & Communications and Financial sectors during the crisis. 
  • Profits have fallen, while employee numbers have been cut slightly. Investment has also been reduced in some areas, particularly for capital spending.
  • Customer demand, regulatory requirements and transport problems are all prominent growing challenges.
  • Looking forward, however, companies are optimistic about future conditions, resulting in the Business Confidence Index climbing to a record high. 
  • Sales are projected to rebound strongly and, in response, businesses expect to start hiring again.
  • Rises in sales should also help to lift profits. Companies expect this to support an upturn in investment spending, following a year of restraint.

London’s Business Confidence Index has risen to its highest-ever level in Q2 2021 since the survey began in 2004. The prospect of a rebound in economic activity, as well as the resilience of London’s important IT & Communications and Banking, Finance & Insurance sectors during the pandemic, have clearly helped boost sentiment in the capital. The exclusion of financial services in the Brexit deal was a source of concern for London. 

Domestic sales and exports growth, and customer demand as a challenge

Over the past year businesses in London have endured a tough sales environment. They have suffered a year-on-year fall in domestic sales of 1.7%, in line with the decline seen nationally. Export performance has been slightly better, with a modest fall of just 0.5% in the year to Q2 2021, slightly above the UK average. The resilience of the capital’s globally-important IT & Communications and Banking, Finance & Insurance sectors is likely to have helped cushion the fall in exports here. Another factor that may have helped to soften the fall is rising demand for financial services in some Asian countries, some of which have already started to rebound sharply from the pandemic. 

However, sales performance is still weak in the context of historical performance. Reflecting this, customer demand stands as the most widespread growing challenge in Q2 2021. Indeed, 44% of businesses cite this issue, considerably higher than the 34% rate of a year ago. 

Selling and input prices, profits growth

London stands as the only part of the UK where businesses have cut their selling prices over the past year. These are down by 0.3%. Falling selling prices such as professional fees, combined with declines in sales, have fed through to profits, which are 3.0% below their level from a year ago, a sharper fall than nationally. 

Although profits have fallen considerably over the last 12 months, it is very likely that the contraction here would have been steeper if not for a slowing of input price inflation over the same period. In the year to Q2 2020 input prices rose by 2.2%, a considerably faster rate than the 0.3% increase in the year to Q2 2021. 

Labour market

Businesses have also reduced their labour costs over the past year. They have lowered staff levels by 0.6%, while average total salaries have been cut slightly by 0.2%. That said, the declines in employment are modest relative to the shocks to output during the pandemic, and also when compared with the sharp falls seen after the global financial crisis. The government’s Coronavirus Job Retention Scheme has been crucial in limiting job losses over the past year.  


Against a backdrop of weak demand and high uncertainty, businesses in London have restricted their spending on capital assets. Companies lowered their capital investment by 0.4% in the year to Q2 2021. In contrast, Research & Development (R&D) budgets rose by 1.1% over the same period, although this was still below the historical average for the region. 

Business challenges 

There remains a great deal of uncertainty over the evolution of the COVID-19 pandemic, with the emergence of new strains in important global markets, particularly India, a significant risk. Adding to that, businesses in London report several growing challenges. As well as demand concerns, the proportion of companies in London reporting transport problems (28%) as a growing concern stands at nearly three times its historical average (11%) in Q2 2021. London is likely to have been particularly affected by international travel restrictions and the cancellation of most flights. In addition, regulatory requirements stand as a more pressing issue for 32% of companies, making it the second most widespread challenge after customer demand. COVID-19 restrictions are, of course, likely to be a factor here. Challenges for businesses in adjusting their operations to the new trading rules between the UK and EU may also be part of the explanation, although for the financial sector, the recent Memorandum of Understanding between the UK and EU provides some reason for confidence, at least for the near future.     

Prospects for the next 12 months

As the vaccine roll-out gathers pace and the UK advances down the government’s roadmap out of lockdown, businesses are hopeful that economic activity will rebound sharply. This underpins the rise in London’s Business Confidence Index. Businesses project that domestic sales and exports will rise by 5.9% and 3.5% respectively in the year ahead. If the growth in the former is achieved, it will be the fastest increase in the region since the second quarter of 2008. 

Improved sales performance should also lift profits, and companies expect a rise of 5.8%. They also intend to start hiring again, with employee numbers expected to increase by 2.7%. Investment rates are also set to pick up markedly. Capital investment and R&D budgets are projected to increase by 2.8% and 2.1% respectively, supported by profit rises and the need to avoid capacity constraints in the face of rising demand.