Following the release of ICAEW’s Q1 Business Confidence Monitor (BCM) we hosted the Economists’ Debate on 25 April 2023, bringing together expert speakers Liz Barclay, UK Small Business Commissioner; Kitty Ussher, Chief Economist at the Institute of Directors; Tom Pope, Deputy Chief Economist at the Institute for Government; and Suren Thiru, ICAEW’s Director of Economies.

A plenary session chaired by Iain Wright, ICAEW’s Managing Director, Reputation & Influence, gauged their views on the current economic climate, as well as the outlook for the future.

And with levelling up high on the agenda, 11 regional breakout sessions took the economic temperature across the UK, asking ICAEW members from a diverse range of sectors about their experiences of the past six months, finding out how they are reacting to economic conditions and their thoughts on the opportunities and risks for businesses in their respective regions. 

Take on the last six months

It’s been a difficult time for business, navigating inflationary pressures with squeezed margins resulting from cost increases not able to be fully passed on in price rises. These issues were widely cited in consumer-facing sectors including retail and hospitality, with a member in retail stating that “margin pressure is an ongoing challenge, but we remain cautiously optimistic”.

Despite the challenges and – reflective of the uptick in confidence evidenced by the Business Confidence Monitor – members remained resilient. There is an acceptance that the cost-of-living/cost-of-doing business crisis will have an impact for a long time to come, alongside a recognition that rises in interest rates have yet to impact all pockets. As consumers drop out of fixed-term mortgage deals, inflation’s bite could get bigger.

Members in the construction sector reported feeling “rather battered” as a direct result of a cooling in the housing market and ongoing cost and labour pressures. 

The combination of both political and economic instability was reported as having a negative effect on investment decisions across all regions. Access to funds have been harder to come by, with lenders more risk averse and requiring higher levels of due diligence. The subject of getting SME investment back on track is discussed in depth in this ICAEW Insights podcast episode. 

For many, exploration of opportunities presented by exporting had been put in the ‘too hard’ pile. Members in the North East highlighted that the administration burden of importing/exporting needs to be reduced for businesses. Members in Northern Ireland, meanwhile, commented on the political landscape as creating “uncertain times”.

Labour and access to skills was discussed across all regions. Throughout 2022 this was the most widely reported challenge and it continues to be so in 2023. Concerns over empty offices and the loss of creativity due to hybrid working was cited a cause for concern by members in the South East. In a bid to meet client demand, a practice firm in the North East reported actively recruiting overseas, with recent recruits hired in South Africa. 

Reaction to economic conditions

A clear focus on consumer trends was highlighted by retail members in the Midlands. With reduced discretionary spend and a more discerning customer, competition for physical and digital footfall has heated up.

Most businesses reported going back to basics, including reducing debt exposure and protecting working capital. In addition, the importance of tightening contractual arrangements was mentioned by members in the North West, who described adaptability and agility as key. The importance of a secure and reliable supply chain was a topic of discussion in the Midlands, with recognition of the importance of treating suppliers fairly. 

Members in Northern Ireland reported prioritising growth driven by profitability over taking on additional debt. Despite uncertainty and access to finance proving a drag on investment decisions, exploration of innovation and efficiency gains were discussed across multiple regional rooms. Embedding artificial intelligence in new and growing data assets was noted in Wales, along with subsidised funding and consultancy support to assist investment in net zero. 

On labour, businesses reported working harder to ensure they remain attractive to staff and offering additional benefits to encourage retention. The importance of programmes to build a flexible workforce that can adapt to an ever-changing environment and the development of clusters were discussed. In Wales, the development of a growth studio that aims to be responsive to post-seed and early scale-up businesses was highlighted. 

Risks and opportunities facing businesses

A key risk highlighted in many of the regional rooms was a reliance on discretionary spend. For smaller businesses in particular, decisions are increasingly influenced by consumer confidence, with well-established organisations having an advantage over newer/unheard of companies, which are seen as a “more risky option”.

Business reliance shone out in a comment made in the Midlands room – “look for the green shoots of where things will get better and the opportunity to disrupt in response to changing consumer behaviour” – a sentiment shared across other regions.

Members in the construction sector highlighted the demand for housing as a huge opportunity, but curtailed by a planning system not working well and creating a huge amount of unpredictability. In the South West, there was a call for government to look closely at planning support and planning law to encourage growth.

Devolved decision-making was seen as an opportunity to drive the development of skills and “much-needed” infrastructure investment. A member in the North East cautioned: “If a region doesn’t have a devolved economy, it can be perceived as a negative for inward investment.”

Investment zones present a further opportunity, but “currently lack clarity and detail”. The Welsh discussion highlighted opportunities in compound semiconductors and green technology, but cautioned that the US with its Inflation Reduction Act, closely followed by the EU's response, had already “stolen a march”.

Furthermore, acquisition of Aberthaw Power Station in South Wales presents an “enormous opportunity” to dismantle and regenerate for green and renewable cluster development bringing expertise and investment to the region.

Investment in emerging industries was discussed in the North East, including a lithium factory in Tees Valley and a semiconductor plant in Durham – both promising to provide vital support for the development of battery manufacturing in the North. In Scotland, sustainability in aviation was presented as an opportunity, but it is dependent on “the need to drive investment”. In the South West, leveraging the region’s natural advantages, including the extensive coastline and tourism – despite seasonal risk – emerged as a regional strength. 

On people, improvement in the Apprenticeship Levy was seen as something that could address the shortage of non-management skills and develop skills in target industries including, engineering, manufacturing and digital. Schools and businesses are seen as having a role to play in working together to shape curricula to give young people more visibility of career pathways and opportunities. Use of technology was a recurring theme mentioned in most rooms as presenting huge opportunities to create capacity and increase productivity in companies to drive growth.

In summary

It is evident from discussions that businesses have had it tough in recent times, but despite this, business resilience remains strong. The diversity of UK regions presents huge opportunities for growth and ICAEW chartered accountants have an important and valuable role to play in helping businesses weather the storm.