Business confidence remains at record high

Business confidence has hit a record high for the second quarter in a row, according to a survey of chartered accountants by the ICAEW.

ICAEW’s Business Confidence Monitor (BCM) found optimism at 47 on the quarterly index, its highest level since the survey was launched in 2004 and surpassing the previous record set last quarter.

The optimism was shared by businesses of all sizes across all sectors, nations and regions in the UK. The record reading was a likely reflection of the expectation of strong sales growth in the year ahead, especially in the domestic market where a record rise of 7.4% is predicted over the coming 12 months. Companies also expect a sharp boost in export sales, which will rebound to pre-pandemic rates of increase.

However, the likelihood of confidence remaining positive is highly dependent on the COVID-19 situation not deteriorating further, ICAEW said. Decisions on interest rates, the winding down of support schemes, such as furlough, could also have an impact on future business sentiment.

Office for National Statistics figures published last week showed that Britain’s economy grew 4.8% between April and June, below the 5% that the Bank of England had forecast.

Michael Izza, ICAEW Chief Executive, said “Business confidence has now hit record levels for two quarters in a row – companies are clearly benefitting from rising customer demand as the economy reopens and life begins to return to normal. The high level of optimism is unsurprising but it remains vulnerable to a possible resurgence of COVID-19 as we head into the autumn.”

“While confidence is high across all sectors, with companies reporting record expectations for domestic sales growth, they also told us they face challenges from skills shortages, wage increases and rising costs.”

“This is a crucial stage for the economy. Despite having to cope with the winding down of government financial support and possible interest rate rises, businesses are definitely bouncing back, but finances are fragile and any additional costs could threaten the recovery.”

Companies have faced growing issues with the labour market as the economy unlocked. Staff turnover was a growing challenge for 23% businesses in Q3 2021, compared to just 12% in the previous quarter, while there has also been a sharp rise in the number of firms struggling to find skilled staff.

Meanwhile, transport problems have become more widespread, particularly for manufacturers. However, late payments have diminished as a growing concern as companies have rebuilt their finances.

Just a third of firms cited customer demand as a growing challenge. The figure has trended downwards as the economy has opened up. More companies than in previous quarters also cited regulatory requirements as an increasing source of difficulty.

As the economy expands, businesses expect costs and prices to rise, especially where demand has returned but supply chains have been constrained. This is already happening both domestically and globally, with increases in prices for raw materials and fuel, ICAEW said.

Input prices increased in Q3 and are expected to rise further over the coming year. As a result, businesses have put up their selling prices, which they expect to increase by 1.4% in the next 12 months.

Spare capacity has fallen to its lowest level for five years, at 46%, reflecting the strength in demand and companies withdrawing unused capacity. Profits, meanwhile, were slightly down on a year ago but companies expect them to rise substantially in the year ahead.

As a result of more optimistic sales projections, companies anticipate spending more on capital equipment, and research and development, over the next 12 months.