ICAEW’s Q2 Business Confidence Monitor (BCM) continues the trend to positive territory established in Q1 – but not by much. A marginal increase in confidence reported by the index from 2.5 (Q1) to 6.1 in Q2, while a step in the right direction, is only a tentative one.

Confidence remains relatively weak against a challenging and frustratingly stubborn economic backdrop, with members reporting similar concerns to those expressed at the end of Q1. However, the narrative for Q2 highlights a growing challenge in the form of regulatory requirements.

Prior to the 26 July release, ICAEW held a briefing session with external stakeholders, including the Small Business Commissioner, British Business Bank and the UK Infrastructure Bank. Meanwhile, ongoing dialogue with ICAEW members across our network of committees, community advisory groups and regional groups provided some of the real stories behind the BCM.

Confidence

Issues relating to accessing skills, retention and recruitment remain the challenge most widely reported by members, as well as a persistent pressure that serves as a drag on growth and a driver of salary and wage inflation. 

Concern over energy costs has somewhat abated, but members remain worried about contract terms ending and the potential impact of a difficult winter on future energy prices. 

Increased resistance to price increases is forcing businesses to absorb the hit, with members recognising that persistent rises are not sustainable and potentially damaging to commercial relationships. Fortunately, input price pressure appears to be easing, providing some relief to squeezed margins. 

The construction sector has had it particularly tough. An insolvency practitioner in the south specialising in the sector reported in May that many were being caught out by fixed-price contracts. This, combined with increases in rates of pay and material costs, was resulting in “huge losses”. Despite input cost pressures appearing to ease, the cost of capital and waning demand due to rising mortgage rates continue to take their toll. 

Another member warned: “The mood music of uncertainty kills the property market – everyone is sitting on their hands.” Commercial property is holding up better, given it is “less of an emotional decision with a more informed buyer who understands this is cyclical.”

Another troubled sector – retail – was described by a member in the North West as having taken a “nosedive”, particularly on big-ticket items such as furniture and white goods. In sharp contrast, luxury goods such as jewellery and watches look to be holding up better.

Cautious discretionary spend suggests a storm may be brewing. A member working in the North East’s financial services sector warned that while there is little evidence yet of increased risk of mortgage default, “the theory is people are building up credit card debt and mortgage risk is yet to hit, with those coming off fixed deals facing a potential cliff edge”. 

Labour market

Labour challenges remain across all sectors. Businesses have recognised continued pay increases are not sustainable and are exploring other ways to attract and retain staff, including bonuses, free food and reduced hours.

The National Minimum Wage has been cited, especially by members in manufacturing, as having a knock-on effect on wages and salaries at all levels to maintain and protect pay differentials. This has also been prevalent in retail and hospitality sectors.

The ability to service increased demand for audit, accountancy and advisory services has been hampered by a shortage of staff, and practice firms have struggled to hire. There are increased reports of trainees moving mid-contract. Several firms are exploring international recruitment to combat UK candidate shortages, with one considering opening an office in South Africa and expanding its training offering there. 

The challenges presented by hybrid working are a regular discussion point among members. There appears to be a move back to the office, demanded by employers, but resisted by staff. Work ethic is frequently bemoaned across all sectors, with the pandemic blamed for changing attitudes towards work. Member feedback suggests the work environment has changed: “People have got used to working in a more relaxed way, albeit in a much tougher environment.”

Investment

ICAEW members still report adopting a wait-and-see approach to investment,. Short-term instability and the uncertainty posed by a looming general election have negatively impacted businesses’ ability to make long-term decisions with confidence. ICAEW discussed the challenges of getting SME investment back on track in this podcast episode.

The legacy of increased energy costs has whetted appetite for investment in renewable options. “The high price of energy has done more for green than anything else, but the transition to net zero lacks finance and people”, one member in manufacturing explains. However, members are not expecting significant changes in policy ahead of a general election. 

The Inflation Reduction Act in the USA (and to a lesser extent Europe’s Green Deal Industrial Plan) is regularly cited by members hoping for an announcement on UK policy in the Autumn Statement. In the meantime, given the multitude of challenges facing business, we hear reports from across sectors that green initiatives are falling down priority lists.

Access to finance

Rising interest rates have made finance more expensive and, facing ongoing pressures, businesses generally have less cash reserves available. Access to finance is a growing topic of concern, alongside frustrations in interactions with banks and frequent reports of delays in opening accounts.

A member in the charity sector highlighted the loss of personal relationship managers as a principal cause of these issues. Another member working in logistics explained: “Setting up a bank account for a small business is almost impossible. You can register a company in 10 minutes, find a client in a week, but it takes three months to open an account.”

Banks remain cautious in extending finance to direct-to-consumer-facing businesses, including the construction and retail sectors, further adding to the weight of challenges these sectors continue to endure, sectors also highlighted as Financial Reporting Council (FRC) areas of supervisory focus for 2023/23,

Access to finance, cash flow, late payments and regulation (see below) were discussed this month at a meeting with members and the Small Business Commissioner at Chartered Accountants’ Hall. A practice firm in the North East reported that clients are pushing back on paying, even though service levels have been agreed upfront. This is a common theme, with businesses having to dedicate precious time and resource to resolving queries and chasing payments. 

ICAEW will be responding to the Treasury Select Committee Call for Evidence on SME Finance, with a deadline of 13 August. Views from members across the UK will form part of this response. Members with insights they would like to share should email Simon Gray, ICAEW’s Head of Business. 

Regulation

Brexit is still seen as a major constraint, particularly exporting to the European Union. One member reported having to employ three additional staff to cover the added administration burden. A food retail business in Scotland highlighted an increased reliance on handlers for documentation and processing of imports. More than “just extra red tape, this creates more tension between suppliers and the business and has a negative impact on the shelf life of food because delivery takes longer”, it warned.

Feedback from ICAEW’s Global Trade Community Advisory Group suggests regulation penalises smaller businesses, noting that “larger businesses have the staff and resources to deal with the level of paperwork required, but small businesses struggle due to lack of resources”.

Indirect regulatory pressure through the supply chain from large to small is a growing member concern. One running a manufacturing business in the East Midlands warned: “We have to spend time auditing our supply chain due to pressure from larger businesses we supply and have found some companies don’t have modern slavery, business continuity and, in one case, a privacy policy in place, which puts us in a difficult situation as we can’t easily find alternative suppliers.”

The Finance Director of a logistics company in London commented that “larger companies use regulation to create a competitive advantage” and described the regulatory environment as a “ratchet process going up and up”. Members in smaller businesses have asked for a consistency of forms and requests, particularly when it comes to sustainability reporting. This has been identified as one way for big business to help.

ICAEW members working in smaller businesses are generally not opposed to regulation, but feel disadvantaged, compared with larger organisations, citing a lack of resources (people and expertise), a lack of funds to seek external help and the level of competing pressures they are currently facing. 

ICAEW’s Better Regulation project aims to help ICAEW and its members understand how the UK’s regulatory regime might be improved and to call for change where needed. ICAEW’s dedicated Better Regulation hub includes articles and interviews with ICAEW members on the issue.