Business confidence hits four-year low

Business confidence has fallen to its lowest level in four years, according to the ICAEW Business Confidence Monitor. The index recorded a score of minus 14.6 for the second quarter, marking six consecutive quarters of negative reading, the joint-longest streak since the 2008 financial crisis.

Negative confidence readings typically coincide with difficult periods for businesses and the UK economy, such as the significant inflation shock that followed Russia’s invasion of Ukraine in 2022, ICAEW said.

The fall in confidence likely reflected weaker expected sales activity and rising cost pressures, amid growing geopolitical turbulence, ICAEW said. Projected growth in sales, gross profits and turnover for the year ahead all slowed in Q2 as concerns over customer demand increased. [2]

Geopolitical risks were the biggest growing challenge to performance, with 65% of companies citing this as an issue, likely reflecting the fallout from the Iran conflict and increasing domestic uncertainty as a change of prime minister looms large.

Labour costs (58%) were the second biggest challenge amid the notable minimum wage increase during the survey period, followed by energy costs, with the percentage of firms highlighting this issue rising sharply from 35% in Q1 to 55% in Q2. The closure of the Strait of Hormuz and rising fuel prices meant the share of businesses citing transport worries nearly doubled from 11% to 20%, the highest for over two years.

Sentiment was negative in eight of the nine sectors surveyed, with confidence most negative in business services (-20.7), followed by property (-19.3). In contrast, confidence among energy, water and mining firms was strongly positive (10.5).

Input prices ticked up to 4.1% in Q2, the highest since Q3 2024, reflecting higher input costs and global pressures, while businesses raised their forecasts for the rate of input cost growth over the next 12 months to the highest level since Q1 2023. In contrast, salary growth slowed slightly in Q2 and is predicted to slow in the year ahead, the BCM found.

Selling price inflation edged up to 2.5% in Q2, its highest level since Q4 2024, with expectations for the next 12 months increasing to the highest point since Q1 2024.

By sector, the prices charged to customers by energy, water and mining firms are expected to rise the most in the year ahead, followed by transportation and storage. In a further sign of the financial stress on businesses, 24% of firms cited late payments as a growing challenge, the highest proportion since Q1 2021. Concerns over bank charges also ticked upwards to 10%.

By sector, worries over late payments were highest among firms in construction (37%), IT and communications (30%) and transport and storage (28%).

Alan Vallance, ICAEW Chief Executive, said “These findings are a sobering reminder of just how exposed UK businesses are to global instability. The war in Iran has knocked confidence significantly and the economic consequences are proving hard to shake.

“Our research shows that most businesses are increasingly troubled by geopolitical risks, and frankly, it’s hard to see these worries easing until hostilities truly subside. With a summer of domestic uncertainty on the horizon, the next prime minister must prioritise cultivating the conditions for companies to thrive and grow, including reducing the complexity, cost and uncertainty that are holding them back.”

Suren Thiru, ICAEW Chief Economist, said “Our survey signals a torturous second quarter for the UK economy, as the Iran conflict sent business costs skyrocketing and sapped expectations for future sales, driving sentiment into a steep decline.

“While this disheartening drop in confidence was broad-based, the business services sector was hit especially hard, with growing uncertainty, elevated labour costs and rising regulatory pressures all weighing on sentiment.

“Businesses are responding to strengthening cost pressures with only limited price rises, indicating that weaker demand means many firms are struggling to fully pass higher costs on to customers, squeezing profit margins.

“Even if the peace deal holds, the weakening in forward-looking sales indicators points to a difficult second half of the year for the UK economy, as the aftereffects of the Iran conflict continue to weigh on activity.”