Improvements in economic indicators, including GDP, retail sales and inflation, together with speculation about an upcoming reduction in interest rates have helped to buoy confidence; ICAEW’s latest Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment in comparison to last quarter and the 2023 average. 

Nonetheless, the uptick in optimism is set against a backdrop of ongoing uncertainty, prompting ICAEW members to call for more stability to aid decision-making. The need for certainty – a key theme of ICAEW’s Manifesto – remains unlikely in a general election year. However, a stable political and economic environment is a key ingredient for a renewed and resilient UK.

Growing confidence

Against a difficult economic backdrop, risks continue to dominate discussions. Uncertainty remains a barrier to investment and growth.

In the construction and real estate sector there is slight improvement across residential sales markets. To quote one member: “Sentiment is looking increasingly positive around the expectation that interest rates will fall back to a sensible level.” 

The commercial market, meanwhile, continues to struggle for momentum “but has probably reached the bottom”. Market concerns about contractors and subcontractors collapsing appear to be increasing. As conditions improve, this should hopefully become less of a concern.

In the travel sector, the peak booking season is doing well in the consumer space with a member in the North West reporting year-on-year volumes up 30%. In contrast, business travel continues to underperform. 

A member working for a large FMCG business said the biggest challenge was trying to interpret demand signals with “social media exacerbating consumer fickleness, and inflation and interest rates making for a nervous consumer”.

In retail, a focus on discounting prevails as customers continue to seek out offers. Town centre businesses report lower footfall than usual. One positive is that the number of business closures seems to have slowed since Christmas.

Geopolitical concerns continue to negatively impact confidence. Issues in and around the Red Sea are causing increased costs, uncertainty and delays. Meanwhile, the ongoing situation in Ukraine and the potential ramifications for the semiconductor industry due to tensions with China are also of concern to members. 

Labour market

Labour market pressures appear to be softening with minimal salary increases reported, despite ongoing difficulties retaining talent, except at the lower end of the market. Organisations consistently report budgeting for inflationary salary increases for the lower end and less for more senior levels.

The quest for talent across the technology sector remains highly competitive with start-up businesses in the sector struggling to match the AI/tech salaries offered by larger competitors.

The biggest issue members highlighted following last year’s Autumn Statement was the rise in the National Living Wage, which took effect this month. The requirement to maintain differentials higher up the pay scale and the disproportionate impact on businesses in some of the most troubled sectors including retail, hospitality and construction are of particular concern. 

“We aim to continue being a Real Living Wage payer, but the ripple effect of awarding a 10% pay rise to staff is huge and difficult to afford,” a member working in the charity sector in Scotland reported. “The government is now making the payment of the real Living Wage a condition of certain conservation grants, which we rely on in some rural areas.”

Other members were less muted in their feedback: “The rise has been an absolute kick in the stomach and is going to cost hospitality businesses a huge amount. Given where the economy is we can’t just increase prices. It will cause a lot of companies to go out of business in the next six months.” A knock-on effect could be a curtailment of recruitment plans, but only time will tell.

Meanwhile, the introduction of new flexible working rules from this month are another source of concern for members. “Flexible working rules will add a whole new tranche of problems for us,” a member working in manufacturing in the West of England explained. “There will now be a shift in more requests granted as it’s more known about. Loyalty might disappear now flexible working requests are a day-one right.”

The new flexible working rules and other employment law updates were covered in a webinar delivered to members of ICAEW’s Small and Micro Business Community in association with Acas, now available on demand.

Investment and access to finance

The BCM tells us that investment continues to fall well below the levels required to drive meaningful economic growth. The availability of skilled labour is one issue, including the availability of workers with technology skills. But access to finance is another issue that cannot be ignored. 

A member in the South West noted: “The ineffectiveness of the labour and capital markets are the biggest drag on growth. Despite strong revenue pipelines and contracts on the table, it is extremely hard to access growth capital.” Restrictions on the essential ingredients to drive growth present a risk to UK innovation. 

A member whose business manufactures semiconductors highlighted another barrier to investment: “We want to invest in automation but need more space. We’re now waiting for planning permission to extend the factory.” 

Meanwhile, late payments remain an issue across the board with delays rippling through supply chains. While established businesses have had time to build up working capital and have liquidity to act as a buffer, it’s a luxury that most start-up businesses simply don’t have. “The bigger the customer and the more corporate and international they are, the more likely they play games with pushing credit out,” is a sentiment echoed across the board. 

Complex regulation

The complexity of the regulatory environment in the UK and the difficulties in resolving issues that arise has a significant impact on the ability of SMEs to grow and remain compliant. So says one member who advises the construction sector across the Midlands. It is by no means an isolated view.

Another member expressed concern with the “perceived complexity and punitive tone of regulatory compliance, which can deter the entrepreneurial spirit”.

There is a consistent call to demystify the compliance process to provide clear, constructive guidance to help businesses meet their regulatory requirements with confidence. “By fostering a more welcoming regulatory environment, we can encourage business owners to expand from sole trader structures to limited companies and beyond, thus stimulating start-up creation, job growth, and economic vitality,” is the view of a member in the South West.

The real-life anecdotes shared by ICAEW’s member network about challenges on the ground play a vital role in helping to shape ICAEW content, events and policy positions. We are extremely grateful to our volunteer network of committees, communities and ICAEW regional teams who help us to gather these invaluable insights. To find out more about what your fellow members think, visit our dedicated Member Insights hub.