Lower inflation and strong sales growth helped business confidence in the UK rise to its highest level in more than two years, according to ICAEW’s Business Confidence Monitor (BCM) Q2 . The promising economic outlook provides the foundation for economic growth, as pledged by the new Labour government in its manifesto.

The quarterly study, which surveys 1,000 chartered accountants across the UK, recorded a confidence level of 16.7 in Q2 2024 – up from 14.4 the previous quarter. This marks the third successive quarterly rise and the highest reading since Q1 2022. It also raises confidence to more than double the pre-pandemic average of 7.2.

Suren Thiru, ICAEW Economies Director, says: “These figures suggest that businesses shrugged off any distraction caused by the general election, as lower inflation and stronger-than-expected sales growth drove an encouraging uptick in confidence in the second quarter.”

Sectoral confidence and economic drivers

A breakdown reveals that the financial services and energy, water, and mining sectors are most optimistic. Manufacturing and engineering businesses are among the least confident, stalled by pessimism around domestic and exports growth and profits expectations for the coming year. Only companies in retail and wholesale and property saw their confidence levels drop in Q2.

The rise in UK business sentiment is likely to be driven by weaker input cost inflation feeding through into stronger profits growth and positive domestic and export sales projections, ICAEW says. Businesses saw input cost inflation slow in Q2 for a fourth successive quarter.

Consequently, businesses did not raise prices as quickly, with selling price inflation dropping to a two-year low – a trend set to continue into 2025. Input price inflation in the year ahead is expected to be strongest in energy, water and mining – reflecting recent rises in wholesale gas and electricity prices – and weakest in retail and wholesale. Prices growth is also expected to fall further in the year ahead to the lowest rate since Q1 2022.

Thiru adds: “Although weakening pricing expectations among firms confirm that we are in a more subdued inflationary environment, stubbornly high wage costs indicate that the underlying price pressures the Bank of England worries about have yet to be fully quashed.

“These findings mean that the economy is on track for continued growth in the second quarter, but the muted performance of indicators of investment activity suggest that the UK’s recovery from recession is built on rather shaky foundations.”

ICAEW is calling on the new Labour government to work closely with the business community to unlock stronger economic growth and provide the stability and continuity needed for businesses to plan, invest and grow.

Fifth of businesses raised prices to cover National Living Wage increase

Salary growth remains unchanged at 3.7% year-on-year in Q2, nearly double the historical average, but is expected to slow in the year ahead. By sector, wage growth is set to be slowest in retail and wholesale, and strongest in manufacturing and engineering.

The survey also revealed that almost half of businesses said their costs had risen because of the increase in the National Living Wage. Almost one in five businesses put up prices to cover the increase, while respondents also improved efficiencies, closed pay gaps and increased upskilling of staff in response.

Regulatory concerns reach four-year high 

Regulatory requirements have become a greater challenge to business performance, with two-fifths of companies citing it as an increasing concern in Q2, the highest proportion for four years.

Concerns over regulatory requirements remain sector-specific: they rank highest among companies in energy, water and mining (61%) and banking, finance and insurance (56%), with notable growth in property (50%) and retail and wholesale (42%). 

Meanwhile, one in five businesses say they are increasingly troubled by late payments, the highest proportion since Q1 2021, with those businesses in construction, business services, and manufacturing and engineering most likely to highlight late payments as a challenge.

Investment remains subdued

Companies expect to continue to grow their capital investment at around the historical average, with growth expected to be strongest in transport and storage, and weakest in IT and communications.

The outlook for employment aligns with the general trends seen in sectoral confidence overall, with weak growth expected in retail and wholesale, manufacturing and engineering and property.

Alan Vallance, ICAEW Chief Executive, comments: “It’s promising that business confidence continues to increase quarter-on-quarter, despite companies continuing to face challenges. British businesses need stability and continuity so that they can plan, invest and grow.

"We look forward to working with the new Labour government to help them deliver on their manifesto promise to unlock stronger economic growth.”

For a deeper dive into the current economic climate in the UK, read the latest ICAEW Economic update: inflation target hit, but economy stalls.