The challenging economic conditions facing UK businesses have reached boiling point, according to ICAEW’s latest Business Confidence Monitor (BCM) for Q1 2023. Record high inflation, rising costs including energy and the cost-of-living crisis are all taking their toll on customer/consumer demand. 

However, the BCM findings also reveal that many of the record highs have begun to simmer down, suggesting that some respite could be around the corner.

The BCM, which surveys 1,000 chartered accountants in the UK, puts confidence at -23.4 on the index, the lowest since the global financial crisis of 2009. But although confidence is now lower than in previous surveys, the pace of decline in confidence has actually slowed.

Commenting on the BCM findings, Michael Izza, ICAEW Chief Executive, says: “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.” 

According to the survey, construction businesses have been 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.

“These findings suggest that the economy went from bad to worse at the end of last year,” says ICAEW’s Economies Director Suren Thiru. “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, which are suffering as rising interest rates, a weakening housing market and inflation squeeze output. The struggles facing retailers are also becoming more acute as people cut back on their discretionary spending,” Thiru adds.

Input and selling price expectations ease

Input price inflation hit another record high during the survey period. As a result, selling prices increased at a tremendous 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. Customer demand issues were most acute in the construction sector, where more than half of firms reported concerns, followed closely by manufacturing, retail and wholesale.

Access to capital and labour issues plague businesses 

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 says.

Although easing, labour market challenges remained widespread. The availability of non-management skills was cited as a growing problem for 37% of the companies surveyed, while staff turnover was an issue for 36%. The proportion of businesses mentioning 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. Although input prices and selling prices had continued to rise, expectations for the year had 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.

Weak profit growth drives down investment

Profit 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 more than 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, although at variable rates, with businesses in Scotland and Yorkshire and the Humber the least confident.

“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,” Thiru warns.

• The BCM, which is one of the largest and most comprehensive quarterly surveys of UK business confidence, is being relaunched this year and will now report in January, April, July and October.

• Visit ICAEW’s Inflation hub for a closer look at the impact of inflation on people, businesses, accountancy and the wider economy.