ICAEW’s Q1 Business Confidence Monitor (BCM) shows a return to positive territory but remains relatively weak against a challenging economic environment. Feedback from ICAEW members across our network of committees, community advisory groups and regional groups, provided insight into the business reality behind the BCM numbers.

In an ICAEW briefing involving the Small Business Commissioner, the Department for Business and Trade, the British Business Bank, the UK Infrastructure Bank, the UK Endorsement Board and the Bank of England, we shared our insights under six key headings.

Confidence

The first few months of 2023 has been a challenging period. The fallout from the mini-Budget hit confidence hard towards the end of 2022, with a hangover into the early part of this year. The two most reported challenges being energy costs and issues in accessing skills, retention and recruitment. 

More recently, as reflected in the BCM, confidence has improved with members generally welcoming announcements in the Spring Budget. However, the miss most regularly cited by members was on energy. From 1 April, the move from a price cap to a discount provides less certainty to businesses on energy costs. 

Members working in manufacturing are particularly vocal on this point, with one calling for a fifth ‘E’ in the Chancellor’s pillars of Enterprise, Employment, Education and Everywhere, namely ‘Energy’. Longer term energy cost for businesses, as one member put it, “is the one thing that is still looming large”.

We’ve seen increasing examples of businesses going into insolvency, citing energy costs, squeezed margins and supply chain issues, and our Retail Community Advisory Group warning of the likelihood of more casualties in this sector. A member working in insolvency stated he is busier now than he has ever been in 34 years. To date, insolvencies have tended to be at the smaller end, with mid-market showing more resilience. 

Inflation

Inflationary pressures continue to bite, with members reporting rising input costs and falling demand. Although supply chain pressures have started to ease, input costs remain high and the impact of the cost-of-living crisis on consumer spending is negatively impacting demand.

In retail, for example, where sales revenue has been maintained, members report reduced volumes and a more cautious and careful customer monitoring and, where possible, reducing discretionary spend. 

Consumers are not only looking for bargains but expecting them. One of our members in a large national retailer cited demand at both the luxury and discount ends with the middle ground suffering. Clothing, footwear and more discretionary purchases are having a hard time. Members in the hospitality sector have reported addressing increased costs by reducing opening times and managing capacity through bookings. 

Where businesses traditionally reviewed price increases on an annual basis, they have been doing this more frequently, in some cases quarterly. Last year, price increases were generally accepted and passed on with relative ease through supply chains. This is now becoming more difficult the closer a business is to the end consumer. 

Linked to a general expectation of falling inflation, prices have started to firm up. The Financial Reporting Council highlighted hospitality, retail and construction as three of its four areas of supervisory focus for 2023/24. We are seeing these sectors now struggling to push through price increases. Construction has been impacted by higher interest rates and the knock-on effect to the housing market.

Labour market 

Labour challenges have been prevalent across all sectors. Although pressures have started to ease, businesses have reported losing staff to competitors for 20% salary increases in some cases. Practice firms especially have struggled. With increased demand for audit, accountancy and advisory services, the ability to service demand has been hampered by a shortage of staff.

Companies have been forced to get creative and incentivise staff in other ways. Where possible bonuses have been prioritised over pay awards, to build in flexibility, with some organisations offering reduced hours and free food. Hybrid working continues to present a challenge, which remains a regular topic of discussion among members, along with the merits of a four-day working week.

Investment

In the main, members report adopting a wait-and-see approach with investment decisions slipping down priority lists. Short-term instability has negatively impacted businesses’ ability to make long-term decisions with confidence. 

Full capital expensing for three years in the Spring Budget was welcomed, but members called for this to be permanent, something the Chancellor hinted that he would like to do but was unable to offer yet.

The energy crisis has been a strong motivator to adopt green technology. Although payback periods have improved, investment has been hampered by a complex landscape and a lack of incentives. 

Access to finance

A key determinant of the ability to invest is access to finance. Rising interest rates have made the availability of finance more expensive, and with squeezed margins businesses generally have fewer cash reserves available.

Even prior to the recent turmoil in the banking sector, members have been expressing continued frustration in their interactions with banks. This frustration has been aimed primarily at high street banks, which have been slow to open accounts and appear to be extremely cautious in lending, particularly to direct-to-consumer-facing businesses.

Members in retail carrying higher levels of stock than usual, where possible, have secured finance against this stock, but this isn’t a long-term solution to liquidity challenges. Businesses are working their working capital harder. Chasing debt and delaying payment to suppliers to protect cash has created an environment where, to quote one member, “everyone is paying everyone late”. 

The increase in the National Minimum Wage has forced businesses to look at their overall wage/salary structures with a knock-on effect, to maintain differentials, of having to pay higher paid staff more.

Trade

Businesses struggling in domestic markets would traditionally look to international markets, but the landscape remains complex. 

Post-Brexit, members continue to report exporting to the EU has become more onerous, specifically for smaller businesses without in-house expertise or time to navigate complex rules, made all the more challenging because of economic sanctions and the move to HMRC’s Customs Declaration Service.

One member called for a change in the language, making the point that exporting must be promoted as ‘essential’ as opposed to an ‘optional extra’. Members have generally welcomed the newly formed Department for Business and Trade, seeing it as well placed to link business with the opportunity international trade presents. ICAEW has regular dialogue with the Department for Business and Trade and shares regular content and events through the ICAEW Global Trade Community.