Business confidence in the UK has more than tripled in the past quarter as economic conditions improve, surpassing the pre-pandemic average for the first time in two years. However, says ICAEW’s Business Confidence Monitor (BCM) Q1, hesitancy around investment threatens businesses’ recovery – indicating that the economy is not completely out of the woods yet.
The quarterly study, which surveys 1,000 chartered accountants across the UK, recorded a confidence level of 14.4 in Q1 2024, up from 4.2 the previous quarter and double the pre-pandemic average of 7.2.
Suren Thiru, ICAEW Economics Director, says: “These findings suggest that the economy comfortably exited recession in the first quarter as easing cost pressures and notable improvement across key indicators of business activity drove a robust rebound in overall sentiment.
“This improvement in confidence was encouragingly broad based, with all sectors benefiting from lower inflation and expectations that interest rate cuts are on the horizon.”
For the first time in two years, confidence was in positive territory for all sectors of the economy, the survey found, with businesses in banking, finance and insurance the most optimistic. Sentiment among property and construction firms was also at its highest since Q4 2021.
However, despite the distinct boost in confidence, companies remain downbeat about their investment plans for the year ahead, ICAEW says.
“The persistent weakness in investment intentions suggests that underlying economic conditions are still brittle, with weak productivity and persistent supply side constraints likely to continue limiting our economy’s ability to grow,” adds Thiru.
Investment intentions remain weak
Despite improved confidence, businesses saw a modest rise in capital investment in Q1 2024, up to 2.3% from 1.6% in Q4 2023. However, companies plan to increase investment by just 1.6% over the next 12 months, below the historical average of 2%.
Capital investment spending growth was strongest in the manufacturing and engineering sector in Q1 2024 at 3.5%. This was followed closely by the highly regulated energy, water and mining sector at 3.3%. Companies in the sector anticipate a similar rate over the next 12 months, partly driven by the regulatory pressures they face.
ICAEW Chief Executive Alan Vallance says that despite rising confidence, momentum could be thwarted by businesses’ lack of ambition when it comes to investment.
“The UK economy is less resilient than it should be, leaving it vulnerable to shocks and less agile to embracing innovation. Building an economy with resilience at its core, an end to weak productivity and making the UK the best place to run a business, must be among the next government’s top priorities,” he says.
Sectors perturbed by regulatory challenges
The survey showed that 41% of companies were more worried about rules and regulations, the highest level in almost four years. Meanwhile, just 13% of businesses said bank charges – including interest rates – were a growing challenge in Q1. This was the lowest since Q2 2022 and down from 19% in the previous quarter.
Selling price inflation falls to two-year low
Selling price inflation dropped to its lowest level for two years and this is expected to continue over the next 12 months, the BCM found. Energy, water and mining was the only sector anticipating an uplift in selling price inflation in the year ahead.
Businesses reported a further slowdown in salary growth to 3.7%, year-on-year, the lowest since Q2 2022. A further marginal slowdown in the rate of salary growth in the next 12 months is forecast.
Most sectors saw salary growth either fall or stabilise in the quarter, although retail and wholesale businesses reported an uptick, consistent with the news that some major retailers recently raised minimum pay for staff as supermarkets battle to retain workers and ahead of the increase in the National Living Wage in April 2024.
ICAEW is calling for a new vision in the next parliament for a prosperous and productive UK economy that supports businesses. The ICAEW Manifesto makes a series of recommendations to all political parties ahead of the upcoming general election.
Links to support
For more insights, analysis and resources for organisations facing the rising costs of doing business, visit ICAEW’s Cost of doing business hub.
A new Resilience and Renewal campaign has also been launched by ICAEW to explore some of the most serious systemic challenges facing the UK economy. It brings together government ministers, leading academics and economists to look at how to build a better, more resilient future economy and the vital role UK business and chartered accountants can play.
Advice for government
ICAEW sets out its vision for a renewed and resilient UK, drawing on insights and expertise from its members.