ICAEW’s Business Confidence Monitor (BCM), which surveys 1,000 chartered accountants in the UK, has found confidence at 18.6 on the quarterly index for Q2 of 2022. This is down from a peak of 47 three quarters ago. Sales growth is up, but cost pressures and staff shortages are hampering expectations of a more positive outlook.

“After reaching a record high in mid-2021 as we emerged from the third lockdown after the success of the vaccine rollout, business confidence has fallen back significantly,” says Michael Izza, ICAEW Chief Executive. “Sales growth has been healthy, following contractions during the pandemic, but businesses are aware that this could be derailed by the economic threats posed by the cost-of-living crisis, soaring inflation and global instability from the Ukraine-Russia war.”

The survey results suggest that the government should take action with targeted, strategic financial measures to tackle the cost-of-living pressures and high inflation, to relieve households and stop issues spilling further into the economy, ICAEW adds.

Izza says: “While none of these problems are of the government’s making, they must understand the emotional and financial toll on people and families. The Chancellor should address the high cost of living with targeted, strategic financial measures to prevent disastrous consequences for people’s standard of living and the amount of spending in the economy, which could result in real pressure on businesses.”

Cost pressures mounting

Businesses expect input price inflation to rise by 4.2% in the next 12 months, which would be the joint-highest rate since the survey began in 2004. This reflects ongoing supply-chain disruptions and the sharp rise in energy and commodity prices following Russia’s invasion of Ukraine, according to the survey.

To support their margins, businesses are raising prices to pass costs on, with the 2.3% increase over the past year the fastest rise in the survey’s history. Businesses plan another record increase over the next 12 months. Higher selling prices, along with increasing sales, mean that profits continue to rise after declines in most of the past year.

Staff turnover and the availability of non-management skills are the most frequently cited growing challenges, each affecting two in five businesses. This is possibly a repercussion of people not seeking a return to work following the pandemic, particularly at a time when demand in the economy is high.

Sentiment in the quarter varies markedly by sector, and is highest in IT and communications, transport and storage and business services. It is lowest in construction, manufacturing and engineering and energy, water and mining.

Chartered accountancy practice The Orange Partnership (TOP), which provides cost assurance on open book construction contracts, has seen costs increase especially over the last 12 months according to TOP’s Managing Director, Darren Ward.

“From our professional indemnity insurance to our energy bills, our biggest cost by far is our people and we employ highly qualified and experienced people and remunerate them in line with this – to do otherwise would be a false economy,” says Ward.

He adds: “Taking a wider perspective, current indicators for inflation in the construction industry are worrying. Tender prices are forecast to grow 4-5% year on year. Annual Producer Price Inflation (input prices) was at 19.2% in March 2022, the highest since records began. 

“We are seeing more and more requests to help clients understand inflation issues on their projects – construction could be in for a bumpy ride.”

Strong sales growth matched with decade-high wage increases

Nevertheless, domestic sales have risen year on year after declining in Q2 2021 and are forecast to increase further in the coming 12 months amid continued expectations of strong pent-up demand in the post-pandemic economy.

Exports have grown more moderately, but growth is set to improve next year as coronavirus restrictions are gradually removed in key markets, ICAEW says.

Chris Barlow, Partner at MHA, deals with manufacturing clients in particular and says that many of the firm’s clients have reported high sales projections. However, getting items produced and dispatched is proving more of an issue. He says: “The challenge of salary costs has become more prevalent in recent conversations. Most businesses see that they have little option but to pass such costs onto their customers.”

Staff turnover and skills availability, combined with high inflation, has driven businesses to raise salaries to their highest point in 10 years, the BCM found. Wages are also expected to go up in the year ahead, adding further pressure to the economy.

However, issues with recruitment are unlikely to impede employment growth, with companies planning to grow their workforce by 3.2%.

The proportion of businesses operating below capacity is only slightly above the record low of last quarter, which could explain why companies are increasing capital investment at a near-record pace.

“What business craves is some element of stability, however this seems some way off,” says Barlow. “Many are looking at the government to act in this situation but it is clear that the government is trying to wean businesses off the unprecedented support that was provided during the pandemic.”

He adds: “But I suspect that we will have to see some form of action from the government in terms of incentives in the form of taxation relief to encourage businesses to invest in terms of training and innovation which could be seen as a way of reducing ongoing supply and skills issues. Businesses need to continue to assess and reassess their supply chains in particular.”

Click here for the full report: ICAEW’s UK Business Confidence Monitor Q2 2022