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Business confidence in the UK has dropped to its lowest point on record since the global financial crisis more than a decade ago according to a sentiment survey tracked by ICAEW’s latest Business Confidence Monitor (BCM).
The survey put confidence at -23.4 on the index, the weakest since 2009, the survey found. A weakening economy, high inflation and concerns over customer demand drove confidence down. However, the pace of decline in confidence slowed compared to recent surveys.
Construction businesses were hardest hit and recorded the lowest confidence reading across all sectors. Sentiment was also particularly low for the property, retail and wholesale, and manufacturing sectors, with all reporting more issues with access to capital.
One in five construction firms cited increasing problems with access to capital, while a quarter were concerned by bank charges. Access to capital was also a prominent challenge for more than a third of property businesses – the highest across all sectors – as declining real estate prices and higher interest rates meant they struggled to raise funds or borrow at acceptable rates, ICAEW said.
Though easing, labour market challenges remained widespread. The availability of non-management skills and staff turnover were growing problems for 37% and 36% of companies, respectively. The proportion of businesses citing transport problems increased, remaining elevated but stable, probably reflecting skills shortages such as the recruitment of qualified drivers.
Despite the low confidence reading, the survey found that domestic sales growth was stable, while export sales growth was stronger than a year ago. Though both input prices and selling prices had continued to rise, expectations for the year softened.
Meanwhile, high inflation and persistent tightness in the labour market – specifically associated with the availability of non-management skills – have driven up wages, with salary growth at its highest level since the survey began in 2004 and record rises expected in the year ahead.
Salary growth was strongest for businesses in the transport and storage and construction sectors. Input price inflation hit another record high during the survey period. As a result, selling prices increased at a record rate. However, input and selling price expectations for the year ahead eased for the first time since 2020.
A third of businesses said they faced growing difficulties with customer demand, as the cost of living crisis, higher interest rates and a slowdown in the world economy continued to bite. These problems were most acute in the construction sector, where more than half of firms reported issues, followed closely by manufacturing, retail and wholesale.
Profits growth slowed in the previous 12 months at 4.3%, largely due to the rise in input and wage costs, and businesses expect the trend to continue over the next 12 months. High stock levels are also likely to be adversely impacting company finances, with a quarter of businesses reporting above-normal levels of raw materials and components.
The drop in confidence, combined with weaker profits outlook, has led to an expected slowdown in capital investment growth. Spending on capital assets increased annually by 3.2%, but a smaller anticipated increase of 1.5% would be the slowest rise in over a decade. The planned rise in research and development budgets would also be a 10-year low for the survey.
Regionally, businesses in London reported the largest worsening decline in business confidence during the latest survey period, partly due to the drop in optimism among sectors key to the capital, such as property and IT and communications.
The confidence index further weakened for most of the UK’s nations and regions, though at variable rates, with businesses in Scotland and Yorkshire and the Humber the least confident.
The ICAEW says that the Chancellor should focus on a plan of resilience and renewal to boost business confidence and deliver economic growth to the UK.
Suren Thiru, Economics Director at ICAEW, said “These findings suggest that the economy went from bad to worse at the end of last year. The drop in confidence largely reflects the lethal combination of sky-high inflation and deteriorating customer demand that many firms are struggling to grapple with.”
“This is a particularly torrid time for construction firms who are suffering as rising interest rates, a weakening housing market and inflation squeezed output. The struggles facing retailers are also becoming more acute as people cut back on their discretionary spending.”
“While the easing in price expectations is further evidence that inflation is on a downward path, 2023 is likely to be a bleak year for the economy as record inflation, rising taxes and interest rates push the UK into recession.”
Michael Izza, ICAEW Chief Executive, said “These findings paint a stark picture, showing that business confidence has plummeted to levels not seen since the global financial crisis, as companies continue to struggle with rising costs, higher inflation and turbulent political events both at home and abroad.”
“Financial challenges have had a big impact on certain sectors, and across the board investment is set to fall over the next year, but it is notable that sentiment could be starting to level off. With confidence at a decade low, it’s time for the Chancellor to outline his long-term vision for growth for Britain, injecting resilience into the economy and bringing in a period of renewal for the future.”