UK business confidence fell by the largest amount in two years, amid record tax concerns and sluggish domestic sales growth, according to ICAEW’s Business Confidence Monitor (BCM) Q4 2024.

The BCM also found that companies expect investment growth to slow in the coming year, signifying an overall dip in sentiment. Although inflation has slowed and interest rate cuts are expected soon, most economic indicators suggest that the economy is unlikely to see significant improvement anytime soon.

The ICAEW quarterly study, which surveys 1,000 chartered accountants across the UK, put the confidence level at just 0.2 for Q4 2024 – the weakest reading since Q4 2022 and down from 14.4 in the previous quarter.

Alan Vallance, ICAEW Chief Executive, says: “It’s little surprise that business confidence has fallen considerably. The costs of October’s Budget fell almost solely on business and, as this survey makes clear, our members have expressed concerns about measures that place additional costs on those they support and the wider economy.”

Drops in confidence were recorded in every sector of the economy, with sentiment moving into negative territory in three areas of the economy. Retail and wholesale businesses were hardest hit at -6.2 on the index, followed by transport and storage at -0.3 and property at -0.2.

By business size, confidence among small and medium-sized enterprises (SMEs) declined into negative territory for the first time since Q4 2022, recording a drop from 12.8 to -4.7. Large companies fared better, with sentiment remaining positive.

“We want Britain to be the best place to invest and to start, run and grow a business,” Vallance continues. “To achieve this, it’s vital that the government delivers on its mission to promote economic growth.

“We hope the government will prioritise measures to boost the wider business environment and provide businesses with the clarity and stability they need.”

Record breaking tax burden

The number of businesses reporting the tax burden as a growing challenge hit a record high at 41% in Q4, a significant increase on Q3’s 29% and the first time that tax worries have been the most cited challenge in the BCM’s history. Concerns were partly a reflection of changes to employers’ national insurance (NI) in the Budget, which ICAEW members said would have a negative impact on margins. The reduction in the NI threshold also came as a particularly unwelcome surprise, ICAEW said. 

Domestic sales growth slowed to 3.2% in the quarter, the lowest since Q3 2021 and down from 3.8% in Q3, likely to be as a result of wider economic conditions and concerns over the impact of October’s Budget. Export growth ticked up to 2.8% quarter-on-quarter, but remained below the historic average.

ICAEW Economies Director Suren Thiru says: “Our data suggests that the UK economy endured a rather traumatic end to 2024 as slowing domestic activity and the aftershocks from a difficult Budget caused business confidence to nosedive.

“While this significant slide in sentiment was broad-based, retailers suffered a particularly difficult time, reflecting their greater exposure to the impact of October’s Budget, including the looming increase in national insurance.”

Inflation pressures remain in check for now

Selling price inflation slowed to its lowest level since Q1 2022 and is expected to slow further in the next 12 months, businesses reported.

Salary growth slowed to 3.1% year-on-year, the lowest rate for more than two years but still double the pre-pandemic average. Notably, wage growth in the next 12 months is expected to slow to its lowest level since Q4 2021.

Businesses reported that their input costs slowed to 3.7%, down from 4.2% in the previous quarter and the lowest since Q4 2021. However, companies lifted their expectations for cost inflation in the year ahead, likely due to the expected impact of the Budget and greater global uncertainty. 

Against this backdrop, just 11% of businesses cited bank charges – including interest rates – as a challenge in Q4, the lowest since Q1 2022. ICAEW said this was probably a reflection of the expectation of continued rate cuts from the Bank of England this year.

Investment growth set to slow

Companies reported capital investment growth of 2.6% in Q4, above the historic average of 2.1% and up from 2.4% in Q3. Businesses said that they planned to boost investment by just 1.8% in the next year, with capital investment spending set to be strongest in the energy, water and mining sector and weakest in construction.

Thiru adds: “Although slowing selling price and wage costs make a February rate cut more likely by offering hope that the current upswing in inflation may fade, rising expectations for business costs in the year ahead mean policymakers will remain cautious.

“The economy is in a challenging period with stagflation a live risk and there is little in our key forward-looking indicators of sales and investment activity to suggest that a meaningful improvement is likely anytime soon.”

For a deeper dive into the current economic climate in the UK, read the latest ICAEW Economic update: five key trends for 2025.