Business confidence returns to positive but remains fragile

Business confidence in the UK has returned to positive territory for the first time in a year but remains fragile amid a backdrop of economic volatility, a survey of business leaders has found.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – put confidence at 2.5 on the index for Q1 2023, the first positive reading since Q1 2022 and up from -23.4 in the previous quarter, the survey found.

Despite the recovery, confidence remains below the historic average, as businesses continue to be concerned over future sales, high inflation and rising interest rates.

Construction and property companies were the least optimistic and the only two sectors to have negative readings on the index. These firms were also impacted by financial challenges, including rising interest rates and access to capital. The construction sector was particularly hard-hit, having reported the most widespread problems with customer demand.

Confidence across all other sectors returned to positive territory, with businesses in manufacturing and engineering, and energy, water and mining the most confident. Customer demand was one of the greatest challenges facing businesses, amid the continued cost of living squeeze.

ICAEW said that to build on the confidence reading, the government must form an ambitious plan to inject resilience into the UK economy to boost business confidence and deliver long-term economic growth.

Suren Thiru, Economics Director at ICAEW, said “The rally in business confidence points to a positive first quarter for the economy as the drag on activity from soaring inflation and political uncertainty eased a little. However, with confidence levels still significantly below the historic average as subdued customer demand, high energy costs and rising interest rates continue to hammer firms, there is little to cheer in the latest figures.”

“The notable drop in expectations over future selling prices and stabilising salaries suggests that inflation should fall quickly and gives the Bank of England scope to keep interest rates on hold. Slowing domestic sales growth and continued squeeze on investment and labour supply points to a worryingly fragile economy, which leaves us more exposed to future shocks, including a renewed surge in energy costs.”

Michael Izza, ICAEW Chief Executive, said “After an uncertain year it’s encouraging to see business confidence return to positive territory but there remains plenty for companies to be cautious about as they grapple with high inflation, rising interest rates and slowing sales.”

“While financial and economic challenges have eased slightly, they are still having an impact on specific sectors. Customer demand, meanwhile, remains a big problem for businesses across the board.”

“With confidence still fragile, the government must fix the fundamental problems with the UK economy with a plan to deliver long-term economic growth by injecting resilience and stability into the UK.”

Businesses expect input price inflation to soften in the year ahead, following four consecutive quarters of record increases and their peak in this quarter, the survey found. High energy costs, supply-chain disruptions and Brexit trade barriers were possible reasons for the record rises, ICAEW said, but energy prices are likely to return to pre-Ukraine war levels so costs should ease.

Selling price inflation hit another record high in the first quarter but is expected to ease in the year ahead to their lowest level since Q1 2022 as concerns grow over customer demand. Firms also expect salary growth to stabilise over the next 12 months.

One in five companies were increasingly troubled by the availability of management skills, while one in three cited issues with the availability of non-management skills. Staff turnover was a problem for a third of businesses.

Meanwhile, domestic sales growth slowed to its lowest level since Q3 2021, with a further easing expected in the year ahead. Exports rose at a slightly slower rate than domestic sales, at 4.1%, partly due to Brexit, the report found. The rate of growth for exports has been stable across recent quarters and is unlikely to slow in the year ahead, possibly due to a weaker exchange rate.

As profits and domestic sales growth slow, capital investment rose by 2.4%, down from the 3.4% rise a year ago. Looking ahead, businesses plan an increase of just 1.8%, which would be among the slowest rises in a decade, excluding the declines during the pandemic.

Business confidence recovered across most UK nations and regions in Q1. Sentiment was highest in Yorkshire and the Humber and weakest in London.