Cost of doing business dents confidence in Q2, however, lower than expected inflation offers a glimmer of light conditions persist

Two long-running and highly regarded business confidence surveys, which monitor business leaders’ optimism about the prospects for the UK economy and their companies, showed a decline in sentiment in Q2’23, partially offsetting the improvements reported in Q1 (1) (2).

The Institute of Directors (IoD) monthly Economic Confidence Index fell to -31% in June, down from -6% in May. Company directors who were pessimistic about the UK economy cited two main concerns:

• 33% said the rate of inflation as their main reason, up from 26% in January
• 19% said falling customer demand as their main reason, up from 11% in January

Company directors expect costs and wages to be significantly higher in the next 12 months compared to the last 12 months, which may lead to a halt in investment plans that had only recently been dusted down.

Likewise, a business optimism survey of Chief Financial Officers (CFOs) of major corporates in the UK including FTSE 100 and FTSE 250 companies conducted by Deloitte, also showed a decline in sentiment in Q2’23.

Finance chiefs see tight monetary policy as posing the greatest threat to their businesses, eclipsing the concerns about energy prices and geopolitical risks that have grabbed their attention for the last two years.

CFOs are particularly concerned about the cost of credit. Between December 2009 and December 2021, UK base rates averaged 0.5%. Now, following 13 consecutive interest rate rises since December 2021, the Bank of England’s base rate stands at 5%. As a result, CFOs rate credit as being more expensive than at any time since the end of 2008.

With confidence dipping among finance leaders, there has been a change in priorities. CFOs have sharpened their focus on cost reduction and increasing cash flow for the next 12 months.

Concerns over high energy prices are gradually subsiding as less businesses are reporting to be affected by them.

According to the latest Office for National Statistics’ Business Insights and Conditions Survey (BICS) published in late June 2023, fewer businesses across all industries, except for Services, reported that both production and their suppliers have been affected by energy prices (3).

Overall, there are less affected businesses than at the start of the year and off the peaks seen in the second half of 2022.

However, the wider cost of doing business crisis continues to bite.

Many companies are having to reassess their business finances and operations as they face rising financing costs in addition to labour shortages, high staff turnover, coupled with ongoing issues with supply chains and higher tax rates than a few years ago.

Research by the Aldermore Group found that three out of five SMEs have experienced supply chain delays and as a result they have lost an average of £625,000 in income each (4).

Meanwhile, The SME Insights Report, published by small business insurance provider Simply Business, found that 63% of SME owners believe that rising taxes, interest rates and inflation are eating into profit margins (5).

More than a quarter (26%) of SMEs said that they will be forced to cease trading if the outlook for their business does not improve.

Already, the cost of doing business is driving many businesses into insolvency. During the first three months of 2023, an average of six restaurants were declared insolvent every day (6).

More widely, the number of insolvencies in England & Wales reached an all time high in Q2’23 with 6,403 companies filing for bankruptcy, up 16% from the same month in the previous year (7).

Whilst the outlook for the economy and businesses remains challenging for the rest of 2023 and beyond, recent developments offer a glimmer of light ahead.

First of all, the rate of inflation in June fell to 7.9% from 8.7% in May. This surprised many economists as the rate was forecasted to be 8.2%. The cost of food, petrol and energy slowed down in June contributing to the lower than anticipated increases.

As a result, there is an expectation that the Bank of England will no longer raise interest rates to above 6% early next year.

A survey of manufacturing and services firms, which monitors their opinions on future business conditions, revealed a more positive outlook (8).

Respondents anticipate business activity to increase over the next 12 months including positive predictions for employment, capital expenditure and investment in Research & Development.

Manufacturers plan to increase capex spending as they look to boost automation and raise productivity.

On the other hand, Artificial Intelligence was the fourth most popular area of technological investment, up from seventh last year.

Services firms were particularly keen to add AI capabilities over the coming year, linking this to a need to streamline costs amid sticky wage inflation.

Sources & Notes:

(1) Business confidence plummets in June, The Institute of Directors’ Economic Confidence Index, 01 July 2023 https://www.iod.com/news/uk-economy/iod-press-release-business-confidence-plummets-in-june/

2) Deloitte CFO survey Q2 2023, July 2023 https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html

3) Business Insights and Conditions Survey, ONS, 13 July 2023

https://www.ons.gov.uk/businessindustryandtrade/business/businessservices/bulletins/businessinsightsandimpactontheukeconomy/13july2023

4) £1.9 billion lost in income to UK SMEs as a result of supply chain delays, Aldermore Group, 19 July 2023 https://www.aldermore.co.uk/about-us/newsroom/2023/07/19-billion-lost-in-income-to-uk-smes-as-a-result-of-supply-chain-delays/

5) SME Insights Report, Simply Business, 19 July 2023 https://www.simplybusiness.co.uk/resources/sme-insights-report/

6) Restaurants in crisis: Find out how many have gone insolvent in your area, Sky News, 12 July 2023 https://news.sky.com/story/restaurants-in-crisis-find-out-how-many-have-gone-insolvent-in-your-area-12918972

7) Company Insolvency Statistics Q2 2023 England and Wales, The Insolvency Service 18 July 2023 https://www.gov.uk/government/statistics/monthly-insolvency-statistics-june-2023/commentary-monthly-insolvency-statistics-june-2023

8) UK business confidence remains strong as firms boost AI investment to offset inflation concerns, Accenture/S&P Global UK Business Outlook, 17 July 2023 https://newsroom.accenture.co.uk/english-uk/news/uk-business-outlook-july-23.html