Business confidence plunges over the cost of doing business

Business confidence in the UK has plunged into negative territory as companies grapple with a crisis from the rising cost of doing business according to the ICAEW.

The research found that business confidence falls into negative territory after record peak last year with the cost of doing business now pushing UK closer to recession amid record input costs.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for Q3 2022 put confidence at -5 on the quarterly index, the first negative reading since the pandemic and significantly down on its peak of 47 a year ago.

Higher costs, significant skills shortages and tax and transport challenges likely drove the decline in optimism and demonstrated the cost of doing business crisis that companies faced, ICAEW said.

Economic conditions are expected to be even tougher in the year ahead and, in a climate of high inflation with energy costs set to continue rising, ICAEW said that short-term targeted support will be needed to keep many businesses afloat.

Direct fiscal support will also be required to help households and businesses with their energy bills this winter, and for those struggling with the impact of inflation more widely, the Institute added.

As costs rose, businesses reported that input prices grew to their highest rate since the BCM began in 2004. This reflected a backdrop of Covid- and Brexit-related supply-side problems, and a global surge in energy and raw material costs, ICAEW said. Firms in the manufacturing, engineering and construction sector saw the biggest rise in prices.

As input prices rose, businesses hiked selling prices at a record rate, the BCM found. Companies expect the high rate of inflation to continue, affecting input costs, salaries and investment, indicating that the cost of doing business crisis will persist in 2023.

The labour market has become extremely tight. Two-fifths of businesses reported a shortage of non-management skills, a survey high which particularly affected firms in the transport and storage sector. Staff turnover was a pressing issue for 43% of companies, while at 29% the proportion reporting a shortage of management skills was less prominent but growing.

ICAEW questioned whether this tightening – and the cost of living crisis – could contribute to an inflationary cycle, as workers sought jobs with higher wages and firms upped salaries to meet demand and suggested that pay restraint was unrealistic in the current climate.

Meanwhile, regulatory problems and the tax burden – reflecting the level of taxes companies and customers are now facing – were growing issues for 39% and 27%, respectively. The proportion of companies citing the tax burden as a problem was a record high for the survey.

Domestic sales increased by 6.4% in the 12 months to Q3, following the gradual removal of Covid restrictions. Sales growth is expected to slow, reflecting the problems businesses face.

Exports growth has been weaker and remained in line with pre-pandemic rates. Brexit-related frictions, such as red tape and transport delays, are a likely explanation for this, while some companies have prioritised domestic sales over exports as a result of the UK’s departure from the Single Market, ICAEW said. [6]

Michael Izza, ICAEW Chief Executive, said “It’s little surprise that business confidence has plunged back into negative territory amid record cost pressures and intensifying staff and skills problems. The cost of doing business is causing a crisis for firms and this will only get worse in the coming months.”

“The UK economy is in transition, and decisions made by the new Prime Minister in their first days and hours in office will dictate the future of our economy for years to come. With inflation running at levels not seen for 40 years, ministers must provide targeted support for struggling businesses and households to keep the lights on this winter.”

Suren Thiru, Economics Director for ICAEW, said “The latest results suggest that the UK economy is at a perilous turning point as unprecedented inflationary pressures and chronic supply constraints stifle economic activity. Historically, negative readings for business confidence have signalled difficult periods for the UK economy, including recession.”

“Record high price pressures suggest that the current inflationary surge will intensify considerably in the coming months. A perfect storm of growing input costs for businesses, eye-watering energy bills and persistent supply constraints means that inflation could peak higher and later than the Bank of England predicts.”

“The speed at which these headwinds are suffocating business activity and shattering people’s incomes means that without action, a painful downturn looks inescapable.”