Increase in UK business confidence despite Brexit, according to ICAEW

According to the ICAEW UK Confidence Monitor (BCM), business confidence has increased from -8.7 in Q1 to 6.7 in Q2.

Despite uncertainty surrounding Brexit, the report showed a gradual upswing in business confidence since the EU referendum, with the BCM Confidence Index being in positive territory for the first time since Q2 2016.

Across the UK, business confidence has shifted from negative to positive in 9 out of 11 regions, and similarly, confidence is also up across all company sizes and types.

While levels of business confidence have increased since the EU referendum, businesses are still generally reluctant to make long term plans until there is more clarity following the 8 June General Election. Party statements and manifestos released over the coming weeks should indicate how parties intend to foster business investment.

Expected GDP growth, but rising input costs

GDP growth for Q2 is forecast to be +0.5%, and firms are expecting profit growth and domestic sales to increase.

The report also showed a drastic increase in input costs at double the rate of last year and the fastest since Q3 2012, particularly in the sectors of manufacturing, wholesale & retail, and transport & storage. To combat cost rises, the report said that companies were expected to increase sales prices, thus passing some costs to customers, as well as controlling labour costs by holding wage growth to a rate below inflation. The expected rise in sales growth was therefore not anticipated to result in an increase in job creation and growth.

The increase in business confidence was more prominent in sectors further removed from consumers, such as utility & manufacturing, ICT, and finance and business sectors. Meanwhile, the retail & wholesale sector was still in negative, corresponding to the expectations of shifting input costs to consumers.

The report said that spending on research and development was likely to remain modest, with companies instead expecting greater spend on capital expenditure growth. With 50% of firms having spare capacity, the report indicated that the two factors demonstrated a need for new rather than more technology and equipment.

Stephen Ibbotson, ICAEW director of business, commented: “It’s encouraging to see that confidence is starting to rise after a sustained period of decline. Yet against this improved sentiment, businesses are not investing in staff and wages and may well be waiting to see what happens in the political arena, particularly in relation to how EU negotiations play out.

“Rising input costs will see inflation exceed wage growth which, when coupled with businesses passing on cost rises to customers in order to rebalance the books, will hit consumer spending power. This will likely force households to tighten their purse strings further in 2017, which could challenge domestic growth driven by spending. In order for the UK to become the best place to do business, all parties should spell out how they plan to encourage businesses to invest in long-term growth.”

In January this year, survey research from ACCA showed that UK business confidence in Q4 of 2016 had dropped to the second lowest level since 2011, with 44% of respondents viewing Brexit as a risk rather than and opportunity.