ICAEW's most recent Business Confidence Monitor reports a significant upturn in UK business confidence, attributed to reduced inflation and an improved outlook on sales projections. Stereotypically speaking, a secure and assured economy provides the foundation for strong economic growth.
Lower inflation coupled with strong sales performance during Q2 instigated the rise in the confidence of UK businesses to its highest level in over two years, as reported by The Business Confidence Monitor (BCM). This supports the manifesto of the new labour government, which has promised economic growth within its manifesto.
The survey, which studies data collected from 1000 UK chartered accountants each quarter, recorded a confidence level of 16.7 in Q2 of 2024, representing a substantial improvement on the previous quarter when the reading was 14.4. Encouragingly, this marks another recent rise in readings and the third consecutive one of its kind since Q1 of 2022 – it also exceeds pre-pandemic performance.
Economies Director at ICAEW, Suren Thiru explained, “these figures suggest that businesses remained unfazed by the general election, as lower inflation and stronger-than-expected sales growth drove an encouraging uptick in confidence in the second quarter”.
Confidence and economic drivers by sector
The most recent analysis suggests that the energy, water, mining and financial services industries are exhibiting the utmost levels of optimism, whilst conversely, engineering and manufacturing businesses are currently displaying the lower (whilst still increased) confidence comparatively. This is driven primarily by outlook on domestic and export growth, in tandem with profit expectations for the forthcoming year. On the contrary, the only recorded decline in confidence levels during the same period came within companies in retail, wholesale and property sectors.
Per the ICAEW, the upturn in UK business and economic perception can be closely associated with a reduction in input cost inflation, equating to bolstered profit growth and the aforementioned domestic and export sales optimism. Specifically, input cost inflation slowed for the fourth consecutive quarter in Q2 – consequently, businesses reciprocate this pattern with their approach to price increases. Subsequently, the inflation of selling prices stooped to a two-year low, a trend that is considered likely to continue into 2025. Projections indicate that input price inflation over the next 12 months will be strongest within energy, water and mining (due to recent price escalations in wholesale gas and electricity), whilst inflation is tipped to be reduced the most within retail and wholesale sectors. To note, price growth is also anticipated to diminish further during this next year, marking the very lowest rate seen for over two years in doing so.
Siren Thiru recommends that regardless of the reduction in pricing expectations within companies, the constant of higher wage outgoings could be indicative of underlying, progressive price pressures and that this is a legitimate concern to the Bank of England. Despite these findings suggesting sustained growth during Q2, the conservative markers within investment activity readings indicates that the post-recession recovery within the UK currently stands on relatively temperamental grounding.
ICAEW is of course encouraging the newly appointed labour government to work closely with the UK business populace to assist in fostering positive economic growth, whilst managing the requisite level of stability and consistency for continued strategy, investment and expansion across all size of enterprise in this country.
National Living Wage increase forces business prices upwards
According to data retrieved from the latest report, the average salary growth has been steady during Q2 at 3.7% year-on-year. This is almost double the UK legacy average. Despite this, salary growth is tipped to decelerate in the coming 12 months. From a sector-by-sector perspective, salary growth is likely to be slowest within retail and wholesale markets, with manufacturing and engineering being the strongest.
Separately, the report findings shows that almost half of UK businesses experienced an increase in costs as a result of the rise in National Living Wage. In response, one in five businesses raised prices charged to customers in an effort to counter the increase. Others focused their efforts on rejuvenating efficiencies, reducing pay gaps and upskilling staff.
Regulatory snapshot: concerns reach four-year high
In Q2, regulatory requirements have presented an increasingly demanding challenge for businesses – 40% of which have now labelled it as a “major concern”. This is the highest proportion of this category in four years.
Examining the situation from a sector-by-sector perspective once again, there are trends worthy of observation. Concerns over regulatory requirements are most prevalent in companies within energy, water, mining – plus banking, finance and insurance. Furthermore, there has been notable growth in regulatory concerns within property, retail and wholesale sectors.
One in five businesses have also identified the possibility of late payments as a source of increasing apprehension, representing the highest levels since Q1 of 2021. Among these businesses, those operating within construction, business services, manufacturing and engineering are reported to have been hit the hardest by the challenge of possible late payments.
Investment OUTLOOK: RESTRAINED
Companies expect capital investment growth to continue at current rates (in line with the historical average), with transport and storage showing the most promising growth trajectory. Conversely, the weakest will be within IT and communications.
Employment outlook paints a similar picture to general confidence per sector. Overall, modest growth is expected within ‘retail and wholesale', ‘manufacturing and engineering' and property.
ICAEW Chief Executive, Alan Vallance concludes “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.”