Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – dropped to 14.4 on the index in Q3, the first decline in 12 months and down on last quarter’s reading of 16.7. However, business confidence remains strong and is still double the pre-pandemic average. [1]
The fall in confidence was likely driven by mounting concerns over the tax burden and weaker exports growth, ICAEW said, while investment remained low.
The tax burden was cited as a growing challenge by 29% of businesses, a joint record high for the survey and significantly higher than the historic average. Though the government has said it will not increase the rates of income tax, national insurance or VAT, and will cap corporation tax at its current level for the duration of this parliament, there are concerns that the Chancellor will use the Budget to announce tax increases elsewhere, such as capital gains tax, ICAEW said, which could have had an impact on sentiment.
Though almost all sectors said they were increasingly troubled by tax challenges, this concern was most prominent among firms in energy, water and mining (44%), property (38%) and retail and wholesale (32%).
Meanwhile, exports growth slowed to 2.7% in Q3, down from 3% in the previous quarter and the lowest rate since Q4 2023, likely due to concerns over demand in key overseas markets, ICAEW said. In contrast, domestic sales growth reached 3.8% – up from 3.3% in Q2 – the fastest rate for a year.
Looking to the next 12 months, companies expect domestic and exports sales to grow but expectations have weakened compared to the quarter before. [2]
Businesses in services sectors, as well as construction – buoyed by government announcements about reforms to planning, housebuilding and falling interest rates – were most confident. [3]
However, sentiment in the transport and storage sector slumped, likely due to increased regulatory concerns, including EU border changes, and the weak domestic sales expectations, ICAEW said. It also fell sharply in energy, water and mining, amid worries over tax after the government announced changes to the energy profits levy and increased regulation to punish water pollution, as well as weak predictions for future export and sales growth. [4]
ICAEW said that to boost confidence, the government should use the Budget as an opportunity to conduct an urgent review of the UK’s tax system and introduce reforms to stimulate economic growth, build confidence and drive investment.
Suren Thiru, ICAEW Economics Director, said:
“These figures suggest a slight reality check for the UK economy as weaker expected export and investment activity, alongside fears of a painful Budget, dented business confidence despite a boost from stronger domestic sales growth.
“The notable easing across the indicators of selling prices and salary costs provides reassurance that inflationary pressures remain in check and keeps the door open for a November rate cut.
“While our survey indicates that the economy will expand in the third quarter, the pace of growth is likely to be slower compared to recent quarters as the momentum from the large recent falls in inflation fades.”
Alan Vallance, ICAEW Chief Executive, added:
“While there remain clear reasons for optimism, this drop in confidence suggests that businesses are still cautious about the future.
“The findings show that businesses are troubled by the tax burden and increasingly reluctant to invest. As the UK prepares to host a major Investment Summit, and speculation mounts ahead of a difficult Budget, the Chancellor must give companies the certainty and stability they need. Reforms to VAT and business rates, alongside public and private investment to drive long-term growth and prosperity for the UK, could help to achieve this.”
Inflation worries recede
Selling price inflation dropped to its lowest level since Q1 2022 and is expected to continue slowing over the next 12 months, the report found. [5]
In the year ahead, selling price inflation is expected to be highest in the transport and storage and property sectors, and slowest in energy, water and mining. [6]
Salary growth slowed slightly to 3.6% year-on-year, the lowest rate for over two years, but still nearly double the pre-pandemic average, businesses reported. Overall, wage growth is expected to slow further in the next 12 months, the BCM found. [7][8]
Investment stalling
Companies reported only a slight rise in capital investment in Q2, marginally up quarter-on-quarter. Capital investment spending is expected to be strongest in retail and wholesale, and weakest in transport and storage. [9]
Businesses said they plan to increase investment by just 1.9% over the next 12 months. This compares to Q2, when companies said they plan to increase investment by 2.1%.
ENDS
Notes to editors:
CONTACT: ICAEW media office tom.mackintosh@icaew.com or 07866 853841
***The full report is available on request***
The Business Confidence Monitor (BCM), which is one of the largest and most comprehensive quarterly surveys of UK business activity, began in 2004.
1,000 Chartered Accountants based in the UK responded to a telephone survey between 15 July to 20 September 2024. Businesses were categorised in terms of size (number of employees), region and industry sector. Regional classification used was ONS Government Office Regions.
- The pre-pandemic average from 2010-19 is 7.2.
- Domestic sales (5.1%) and exports sales (4%) are expected to grow in the next 12 months.
- The BCM index stood at 25.3 in construction, 21.8 in banking, finance and insurance and 21.3 in IT and communications.
- The BCM index stood at 1.9 in transport and storage and 4.4 in energy, water and mining.
- BCM measure of selling price inflation stood at 2.6% in Q3 and is expected to grow to 2.2% in the year ahead.
- BCM measure of selling price inflation will be highest in transport and storage (2.7%) and property (2.4%), and slowest in energy, water and mining (1.5%) in the next 12 months.
- The pre-pandemic average for salary growth from 2010-19 is 1.6%.
- Salary growth will slow to 2.9% in the year ahead.
- Capital investment spending grew by 2.4% in the year to Q3, and growth in the year ahead will be strongest in retail and wholesale (2.7%) and weakest in transport and storage (0.6%).
- 10. Business Confidence Index methodology - The Business Confidence Index is calculated from the responses to the following:
“Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months?”
A score was applied to each response as shown below, and an average score calculated:
| Variable | Score |
| Much more confident | +100 |
| Slightly more confident | +50 |
| As confident | 0 |
| Slightly less confident | -50 |
| Much less confident | -100 |
Using this method, a Confidence Index of +100 would indicate that all survey respondents were much more confident about future prospects, while -100 would indicate that all survey respondents were much less confident about future prospects.
As one of the largest and most comprehensive quarterly surveys of UK business activity. BCM is closely watched by key policymakers, including HM Treasury, the Bank of England, British Business Bank and the Small Business Commissioner.