Despite a marginal rise in UK business confidence since the last quarter, business confidence remains below pre-pandemic levels, with business challenges including higher interest rates, customer demand issues and economic and political uncertainty cause for concern.

It has been another challenging period, particularly for consumer-facing businesses in the retail, tourism, hospitality and property sectors, all identified as FRC areas of supervisory focus for 2023/24. Despite signs that cost pressures have started to ease, and although the rate of inflation has fallen, the real question is when interest rates will follow. 

ICAEW presented the findings of its Business Confidence Monitor (BCM) Q4 2023 at a pre-briefing session attended by external stakeholders, including the Bank of England, UK Small Business Commissioner, Financial Reporting Council and the British Business Bank, focusing on six key areas: confidence; interest rates; labour market; investment; access to finance; and regulation.

Confidence

Against a difficult economic backdrop, risks dominated discussions. Members highlighted challenges caused by ongoing economic and political uncertainty as a barrier to growth while recognising the opportunities that more stability could bring. As one member summarised, “Everyone will sit on their hands until the election.”

Falling demand in the UK is forcing businesses to look overseas and towards the public sector for growth, prompting criticism of the “crippling” public sector procurement process, which “takes far too long and requires extensive time and effort”.

Despite an easing of input cost price pressure, liquidity has tightened, especially in construction. 

Geopolitical concerns have potential cost implications. A member who runs an office supplies distribution business explained: “Our container of calculators has been diverted round the Cape of Good Hope – more cost and delay.” 

Despite a reasonable Black Friday, retailer fears that this was simply Christmas come early were borne out in December’s ONS retail numbers, showing that the quantity of goods bought in Great Britain fell 3.2% between November and December.

Inflation has eased, but continues to bite hard. One manufacturing sector member in the South West said: “It’s difficult to pass on additional labour costs to customers who can buy much cheaper imported goods. Manufacturers supplying the retail sector have reported increased difficulty in passing on price increases, due to fears of killing off demand.”

Worryingly, we’ve started to hear stories of increasing levels of bad debts and, with businesses preparing for National Living Wage increases from April, fears of a possible crunch time loom large. One portfolio finance director pre-empted ongoing issues for hospitality and warned that some hospitality businesses were selling assets to balance the books.

Frustration and confusion about the tax system is rife, notably R&D tax credits, prompting calls for more simplification. Fiscal drag was highlighted by members as an issue in need of resolution and something that will negate any benefit from the reduction in the rate of National Insurance. The consensus is that the Autumn Statement was about winning over the electorate rather than helping business and driving growth.

Interest rates

interest rates are having a noticeable impact on consumer spending and business investment across multiple sectors. Although businesses appear more insulated and better able to adapt than individuals, much depends on their level of debt exposure. 

One practice in the West Midlands that services manufacturing clients commented: “The ones that don’t have debt are doing ok, but for those that do, interest rates are killing.” Registered company insolvencies in December 2023 were 2% higher than in the same month in 2022. 

Labour market

With all sectors finding life difficult, businesses reported cutting costs by reducing staff numbers. “The issue now is not how quickly we can get labour, but how quickly we can get rid of labour.” The exception is small practices where labour remains the biggest challenge. Apprentices are easy to recruit but “impossible to retain” and firms struggle to hire qualified staff, with even newly qualified accountants expecting large salaries. 

Although there are signs that labour pressures are starting to ease, members in emerging sectors such as green industries bemoan skills shortages. “There are not enough homegrown skills to support our business, especially in electric cars,” a member from the Midlands warned. 

There is concern that the increase in the National Living Wage will put additional pressure on retail, hospitality and manufacturing businesses, with a knock-on effect through payrolls to maintain pay differentials at a higher level. A member working in a large retail organisation said the rise in the National Living Wage would result in a significant hit to profit. “On top of a 5% pay rise we gave in October, pay is a hefty cost.”

Early indications on planned pay rises for 2024 are at lower levels (up to £30k) 5% with less awarded for more senior staff (2%). “The higher earners seem to understand the logic,” summarised a member in the education and training sector.

Investment

Businesses report “holding fire” on investment decisions until the “base rate plateaus and there is more certainty on how high rates will go”.

The knock-on impact of the cancellation of a significant proportion of the HS2 project raised cause for concern. “The message that HS2’s cancellation sends is bigger than the impact of its cancellation,” said one member in the North West. Members working in manufacturing stress the importance of large infrastructure projects that are government-backed, to help businesses go “cap in hand to the bank”.

The decision to make capital expensing permanent was generally welcomed by members, although they also flagged challenges. “You need a Corporation Tax liability and there is no cash-flow benefit – full capital expensing doesn’t help businesses go to the bank to secure funding for investment.”

Members agree that technology is one of the UK’s priority growth sectors. However, despite the Chancellor’s repeated reference to wanting to make the UK the next Silicon Valley, members bemoan a mismatch between what businesses need and what they are able to access and afford. “What lenders and investors are comfortable and willing to accept in terms of risk is low,” a member working in the sector warned.

Access to finance

The availability and cost of finance is an ongoing concern for businesses. Rising interest rates increase financing costs and are depleting businesses’ cash reserves and curtailing investment decisions. Frustration in interactions with high street banks remains an ongoing issue. Late payments are a challenge across the board, with delays rippling through supply chains. 

Regulation

Keeping up to date with an evolving import/export regime continues to prove difficult. Where demand from overseas is not the problem, navigating regulation certainly is, one business member complained. Members in practice reported “no lack of appetite for cross-border trade”, but cautioned that “the bureaucracy alongside the risk of not understanding the regulations and being in breach of them” only serves to discourage.