New data points to an economy fraying at the edges as inflation and higher interest rates hinder businesses and consumers. The forward-looking indicators from ICAEW’s latest Business Confidence Monitor (BCM) indicate a difficult end of the year for the UK economy, with domestic economic activity, employment and investment intentions disappointingly downbeat.

The UK economy grew by just 0.2% in August, only partially recovering from a downwardly revised 0.6% contraction in July when poor weather and strike action hindered activity, according to figures from the Office for National Statistics (ONS).

Services output, which accounts for over three quarters of UK economic output, was the main driver of growth, rising 0.4% on the month. This more than offset declines in production (-0.7%) and construction output (-0.5%).

Construction confidence collapses

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) – a quarterly survey of 1,000 ICAEW-qualified chartered accountants across the UK – put confidence at 2.9 out of 100 on the index for Q3 2023, less than half the Q2 reading of 6.1 (see chart 1). Sentiment can range from -100 to 100.

Confidence was weakest in the construction sector, plummeting to -30.5. This reflected the sector’s exposure to rising interest rates, high input costs and weak customer demand. Heavy rainfall also dampened sentiment by causing delays to planned project work in the sector. By contrast, confidence was highest among transport and storage companies (18.3) due to a strong holiday season boosting demand for leisure travel.

UK inflation holds steady in September

UK CPI inflation stood at 6.7% in September 2023, unchanged from August and the first time since May that inflation hasn’t fallen, largely as a result of rising petrol prices. The largest downward pressure on the headline rate to the monthly change came from food and non-alcoholic beverages, where prices fell on the month for the first time since September 2021.

Many organisations are now facing painful rises next April as business rates increase in line with September’s CPI inflation. While rising global oil and gas prices are an upside risk, the looming squeeze on wages from softening labour conditions and a waning economy should help put inflation on a firm downward trend.

Concerns over bank charges at record high

ICAEW’s latest BCM also reveals that financial challenges are impacting a growing proportion of businesses. The proportion of organisations reporting bank charges as an increasing problem rose to a record high in Q3 2023 (see chart 2) as tighter financial conditions weigh on the economy.

Bank charges are particularly troublesome for companies in the construction and property sectors. One in five companies cite the tax burden, late payments and access to capital as growing issues, and this helps to explain why the latest BCM figures also show that capital investment growth continued to slow and firms restrained their R&D spending in Q3.

Will interest rates fall this month?

The slowdown in inflation and wage growth together with some signs that the labour market continued to loosen gradually, supports the growing expectation that the Bank of England will cut interest rates from 5.00% to 4.75% at their next policy meeting on 7 November. Although a November interest rate cut looks nailed on, the upward pressure on inflation from the notably higher business costs resulting from some of the measures announced in the Autumn Budget may mean that over the next year policy is loosened more slowly than many had expected.

UK economy – what to watch for this month:

• Alongside its next interest rate decision on 7 November, the Bank of England will present its updated economic forecasts.
• The quarterly GDP data, to be released on 15 November, is likely to confirm that UK GDP growth slowed in the third quarter, from 0.5% in Q2.
• The inflation figures for October, out on 20 November, should show an increase in the headline rate, from 1.7% in September.