Business optimism drops to levels seen before the pandemic

 

Business confidence in the United Kingdom has seen a consecutive decline for a second quarter, reaching average levels not observed since 2014. This indicates that companies are preparing to coexist with the ongoing presence of the coronavirus, as per findings from the ICAEW survey. The ICAEW’s Business Confidence Monitor (BCM), which surveys 1,000 chartered accountants in the UK, has reported a confidence level of 27.6 on the quarterly index for the first quarter of 2022. This figure is notably lower than the previous record high of 47, which was recorded two quarters ago. The report highlights that confidence during this quarter has reverted to the pre-pandemic norm, signaling that businesses are now focusing on the future after the extraordinary challenges of the past two years. Companies have reported a robust 5.3% increase in domestic sales over the past year, a level of growth not seen since 2007. This growth likely accounts for the sustained confidence levels. Projections suggest that domestic sales will continue to remain strong, although the pace of growth is expected to slow compared to the previous quarter. The BCM has identified that export growth has yet to return to pre-pandemic rates, indicating that the recovery has primarily been domestically driven. While this may partly stem from Brexit-related trade and transportation issues, overall export growth is anticipated to recover in the upcoming months. Despite initial concerns about the Omicron variant causing fluctuations in sentiment, subsequent information has suggested that its impact on the overall index is less severe than initially feared. Michael Izza, Chief Executive of the ICAEW, commented, “Following the record-breaking confidence of 2021, it’s not surprising to see a decline as businesses set their sights on the future. Nevertheless, confidence remains robust and is returning to pre-pandemic levels.” He added, “Strong growth in domestic sales has buoyed businesses, with further growth expected in the coming year. However, as companies navigate the months ahead, they are grappling with unprecedented challenges related to staff turnover and the availability of skilled workers, which may impede further growth.”

Unprecedented Staffing Challenges

For the first time since the inception of the BCM in 2004, staff turnover and the availability of non-management skills have emerged as the fastest-growing business challenges. This underscores the significant recruitment difficulties faced by companies. Employee numbers dwindled as workers left their positions during the pandemic, contributing to these prominent challenges. Nevertheless, the report predicts a 3.1% year-on-year increase in employment. “Many manufacturers are finding it extremely challenging to secure individuals with the necessary skills, which is also impacting retention,” noted Rachel Eade, a supply chain specialist at the University of Birmingham’s BCRRE. “We are witnessing considerable movement of skills in the manufacturing sector, with individuals having the upper hand and the ability to switch jobs for substantial remuneration, leaving companies with positions to fill.” Companies have also experienced a 3.4% increase in input price inflation, the highest rate in 14 years, driven by heightened demand for goods and services as the economy rebounds. However, ongoing supply chain disruptions, shortages in transportation, and elevated prices for energy and raw materials have likely contributed to this surge.

Calls for Meaningful Grants

Transportation challenges have become widespread and more severe, while concerns related to taxation and the availability of government support for businesses are also on the rise. The latter is a particularly pressing issue for retail and wholesale businesses heavily reliant on business rates relief, which is set to expire in April. Johnathan Dudley, a chartered accountant and Head of Manufacturing at Crowe, emphasized the need for businesses to build financial reserves and strategize for the future. He cautioned against relying solely on government loans, as they could increase businesses’ debt levels and risk profiles, advocating instead for “meaningful grants.” Dudley, who is also a past chair of ICAEW’s Manufacturing Community, highlighted a proposal called the Coronavirus Business Recovery Offset Scheme (CBROS), which aims to provide a 130% enhanced credit against COVID-19 debt. This credit would serve as an immediate deduction against amounts owed on COVID-19 debt. Furthermore, the proposal suggests structuring the scheme in a manner similar to the R&D scheme for SMEs, offering an effective rate based on the current corporation tax rate (although not necessarily tied to it) of 43.7%, equivalent to 230% of the original expenditure, at the current corporation tax rate of 19%.

Anticipated Profit Growth

Salaries have risen in line with pre-pandemic rates and are expected to experience their most substantial increase in 13 years over the next 12 months. This is partly a response to the significant recruitment challenges faced by businesses due to tight labor market conditions and skill shortages. Employment levels are projected to reach record highs in the coming year, with businesses anticipating a resolution to current recruitment and staff retention issues. Profits are also expected to grow, supported by productivity gains, reduced spare capacity, and the passing on of rising costs to customers. Izza concluded by expressing hope that the government’s plans for leveling up the country can aid in post-pandemic economic recovery. He emphasized the importance of private sector engagement in achieving growth and urged the government to leverage opportunities to position the UK as a leading hub for innovation, science, and technology while pursuing optimal regulation of the advanced economy.

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