Business confidence falls for third quarter in a row

Business confidence in the UK fell for a third quarter in a row, amid concerns on the tightening of the economy and rising inflation, according to latest survey results by the ICAEW.

Sentiment tracked by ICAEW’s Business Confidence Monitor™ (BCM) for Q2 2022 put confidence at 18.6 on the quarterly index, down from its peak of 47 three quarters ago. Cost pressures and staff shortages were hampering expectations of a more positive outlook, ICAEW said.

The ICAEW says that the results suggest that the government should take action with targeted, strategic financial measures to tackle the cost of living pressures and high inflation, to relieve households and stop issues spilling further into the economy.

Businesses expect input price inflation to rise by 4.2% in the next 12 months, which would be the joint-highest rate since the survey began in 2004. This reflects ongoing supply-chain disruptions and also the sharp rise in energy and commodity prices following Russia’s invasion of Ukraine.

To support their margins, businesses are raising prices to pass costs on, with the 2.3% increase over the past year the fastest rise in the survey’s history. Businesses plan another record increase over the next 12 months. Higher selling prices, along with increasing sales, means that profits continue to rise after declines in most of the past year.

Staff turnover and the availability of non-management skills were the most frequently cited growing challenges, each affecting two in five businesses. This was a possible repercussion of people not seeking a return to work following the pandemic, particularly at a time when demand in the economy is high.

Sentiment in the quarter varied markedly by sector, and was highest in IT and communications, transport and storage and business services. It was lowest in construction, manufacturing and engineering and energy, water and mining.

Michael Izza, ICAEW Chief Executive, said “After reaching a record high in mid-2021 as we emerged from the third lockdown after the success of the vaccine rollout, business confidence has fallen back significantly.”

“Sales growth has been healthy, following contractions during the pandemic, but businesses are aware that this could be derailed by the economic threats posed by the cost-of-living crisis, soaring inflation and global instability from the Ukraine-Russia war.”

“While none of these problems are of the government’s making, they must understand the emotional and financial toll on people and families. The Chancellor should address the high cost of living with targeted, strategic financial measures to prevent disastrous consequences for people’s standard of living and the amount of spending in the economy, which could result in real pressure on businesses.”

Nevertheless, domestic sales rose year-on-year after declining in Q2 2021 and are forecast to increase further in the coming 12 months amid continued expectations of strong pent-up demand in the post-pandemic economy.

Exports grew more moderately, but growth is set to improve next year as coronavirus restrictions are gradually removed in key markets, ICAEW said.

Staff turnover and skills availability, combined with high inflation, drove businesses to raise salaries to their highest point in 10 years, the BCM found. Wages are also expected to go up in the year ahead, adding further pressure to the economy.

However, issues with recruitment are unlikely to impede employment growth, with companies planning to grow their workforce by 3.2%.

The proportion of businesses operating below capacity is only slightly above the record low of last quarter, which could explain why companies are increasing capital investment at a near-record pace.

Business confidence weakened across most parts of the UK, the survey found, with those in Scotland among the least confident.

Firms in the East and West Midlands were among the most confident, with the latter boosted by strong domestic sales.