ICAEW’s latest Business Confidence Monitor (BCM) for Q2 2024 shows a continued improvement in sentiment in comparison with previous quarters and the 2023 average. Confidence is now at its highest level for two years, reflecting expectations of falling input price inflation, growth in demand and an improvement in profits.

The survey period ran from 15 April to 22 June 2024, prior to the general election (4 July) and the King’s speech (17 July).

Contributing to growing confidence in Q2 was the expectation of greater stability and certainty. ICAEW, representing the voice of its members, has called for the incoming government to prioritise building an economy fit for the future and hopes to see even more stability to provide a platform for growth. With the result of the general election now known and key policy priorities announced, it will be interesting to see where confidence levels sit in Q3’s results.

Ahead of the official BCM Q2 release, ICAEW presented the findings at a pre-briefing session attended by external stakeholders, including the British Business Bank, UK Endorsement Board, HM Treasury and the Small Business Commissioner.

Attendees were keen to hear real-life anecdotes shared by ICAEW’s member network about challenges on the ground. We are extremely grateful to our volunteer network of committees, communities and ICAEW regional teams that gather insights, which help shape ICAEW content, events and policy positions.

Confidence is key

While challenges in the economic backdrop remain, falling inflation, expectations of interest rates cuts and the announcement of the general election were contributing factors to a growth in confidence.

A member in the construction sector shared: “Interest rates are going to come down, which will make a big difference.”

Despite increased positivity, the persistent rain was a challenge for members working in retail and hospitality in the first part of the quarter. A growth in confidence later in Q2 was linked to an improvement in the weather. “We’re cautiously optimistic now the sun has come out,” commented a member in hospitality based in London.

Falling energy prices have been positive for business performance across the board, with a reduction in the energy price cap easing some cost-of-living concerns. As always, members presented differing views depending on individual circumstances. In manufacturing, optimism was tempered by caution. “It feels like it’s getting better, but the retail sector is still struggling. There’s a good pipeline, but conversion to orders is slow,” said one member. Others in the sector based in the West Midlands noted: “Things are quite good across the board – people aren’t pessimistic, they’re realistic.”

We heard reports that availability of materials is improving in the construction sector, but that prices were still going up for smaller companies lacking the buying power of larger organisations. Bigger organisations reported easing input price inflation, but those importing goods warned about the rising costs of containers due to the situation in the Red Sea and longer lead times because of shipping cancellations or route diversions.

Ahead of the general election, practice firms noted clients pausing business decisions, leading to a slowdown in activity. However, specific policy proposals led to an increase in activity, with practice firms in the West of England reporting doing “lots of work with private schools on scenario planning in anticipation of the removal of the VAT exemption on school fees”.

Labour market shifts

The labour market continues to be a hot topic of discussion among ICAEW members. “Falling inflation has led to some moderation in salary rises in July in comparison with the past 24 months,” reported a member working in education and training in the East of England. Others in the tourism sector noted seeing an “uptick in the availability of people willing to work and improved labour availability without increases in labour rates”.

In stark contrast, other members reported salary expectations still being high due to cost-of-living concerns, albeit that salary expectations are largely dependent on sector and roles. One member working across a range of businesses noted: “Salary inflation is driven by niche positions.”

Businesses reported being more careful with recruitment decisions and are focusing on positions that will drive growth. Organisations continue to debate whether they need human resources or technology resources.

Members continued to raise concerns over the impact of the National Living Wage, with a member in the South West stating: “Wage expectations remain high due to ripple effect through organisations.”

Interestingly, despite the introduction of new flexible working rules and concerns members had raised ahead of April’s pre-briefing session that their introduction would “add a whole new tranche of problems”, there was no anecdotal evidence during Q2 that this fear had become a reality.

Investment/access to finance is mixed

Market uncertainty ahead of the election hindered investor commitment to new projects in the construction sector. In contrast, some manufacturers that had been waiting to begin capital projects, despite the uncertainty of the economic situation, made the decision to go ahead in a bid to remain competitive.

A business member in the renewables sector reported ”planning a big year of investment in automation to increase production capacity and improve efficiency”.

Access to bank finance continues to present a mixed picture. The bank has been “very helpful and increased our overdraft”, reported a member in the fishing sector in the South West. Another view from the retail sector was that “banks are being difficult and setting unrealistic covenants – they don’t get the sector”.

We received feedback that private funding was more fluid, but that grant funding remained harder to come by. Members bemoaned late payments, including customers taking 90-120 days to pay, with a negative hit to cash flow. ICAEW has regular communication with the Small Business Commissioner and will be exploring this ongoing challenge and potential solutions in a roundtable discussion with practice members set for October.

Feedback gathered from ICAEW practice members showed that most firms appear to be in the exploratory phase of engaging with AI, albeit concerns were raised over the accuracy of publicly available data. Most firms reported either having an AI policy in place or moving towards creating one. Technology will be a key theme of ICAEW’s Annual Conference on 4 October 2024.