Sluggish customer demand marred UK business confidence in the final stretch of last year, according to new research from ICAEW.

In its Q4 2023 Business Confidence Monitor, 47% of retail and wholesale businesses, 48% of construction firms and 35% of companies overall cited weaker customer demand as a growing concern. Respondents pointed to the ongoing cost-of-living crisis and high interest rates as the main factors behind the challenge.

Picking up on a theme from the previous quarter’s BCM, a slowdown continued to blight domestic sales growth, which stood at 3.6% year on year – dipping close to the 3% historical average. Growth in export sales slumped below that benchmark to 2.1%. The figures leave both categories at their lowest ebb since Q3 2021.

Meanwhile, one in four companies cited the tax burden as a growing source of difficulty, eclipsing the historical norm of 16%.

Despite an easing of inflationary pressures, the regular survey of 1,000 chartered accountants gave Q4’s business confidence an index score of 4.2. That’s up from 2.9 in Q3 – but significantly below the pre-pandemic average of 7.2, seen from 2010 to 2019.

Profits lose ground

Amid weakened sales growth, the survey showed, businesses were unable to pass on the full rate of rising input costs and wages to their consumers. This lack of wriggle room eroded margins. Indeed, profits growth in Q4 slowed to 2.1% year on year: the lowest rate since Q3 2021 and below the historical average.

In line with that slowdown in profits, capital investment plummeted. At a growth rate of just 1.6% for the year to Q4, it was below historical standards and the lowest since Q2 2021. In ICAEW’s assessment, a blend of financial challenges, weak demand and fragile confidence is always likely to delay companies’ investment plans.

Businesses are expecting much the same growth rate for the coming year.

A spending squeeze has also hit recruitment, cutting employment growth by more than half from its record BCM high of 3.5% in Q3 2021. According to ICAEW, Q4’s hiring growth rate of 1.5% reflects the broader weakness in demand and prevailing economic uncertainty.

Return to growth?

ICAEW Economies Director Suren Thiru says: “These findings confirm that the economy struggled for momentum at the end of last year as weakened customer demand, an onerous tax burden and high interest rates drove a notable deterioration across key indicators of business activity.”

However, over the next 12 months, businesses are expecting faster domestic (4.9%) and export (3.8%) sales growth – alongside profits growth of 4.6%.

Those forward-looking measures, Thiru notes, “are more upbeat, with strengthening indicators of domestic and export activity suggesting that even if the UK did suffer a small technical recession at the end of last year, the return to growth would be pretty quick”.

Easing prices

A year-on-year slowdown of selling prices growth to 3.3% reflected smaller rises in input costs and the challenging economic backdrop. Many businesses chose to absorb some price rises as a means of supporting sales.

Companies are expecting selling prices to grow at a slower rate in 2024, mirroring trends in input cost inflation. By sector, transport and storage businesses saw the biggest falls in selling price inflation last year, followed closely by energy, water and mining.

As a side note, the BCM also suggests that salary growth will slow to 3.4% this year.

For Thiru, the continued easing of businesses’ pricing expectations “provides reassurance that inflation will drop back at a decent pace this year, despite December’s unexpected increase”.

Long-term vision

Summing up the mood, ICAEW Chief Executive Michael Izza says: “Though business confidence has improved marginally this quarter, over the past year companies have struggled with weakened customer demand, slowing domestic sales and exports growth, as well as wider economic problems from high inflation and interest rates.”

Ahead of the Budget, ICAEW has made a submission to the Treasury calling on the government to build an economy based on certainty, clarity and stability – and to introduce the right long-term incentives to influence investment, employment and growth.

With that and the BCM’s findings in mind, Izza adds: “As wider economic fragility persists, businesses and our members – who operate across every region and sector of the UK – need certainty and stability more than ever.

“Therefore, I urge the government to consider setting out a long-term vision for the UK economy that is resilient, obstacle-free and primed for growth.”