UK business leaders are scaling back investment plans as rising prices, Brexit trade tensions and political uncertainty all leave bosses downbeat on the outlook for the economy.
According to the Institute of Directors’ latest survey of business leaders, many companies are now considering increasing their investment. This is the weakest reading since October 2020, as nervous companies control their spending.
UK businesses’ investment appetite has been steadily falling since the start of the year, as input costs have risen and the economy has slowed, undermining efforts to lift productivity.
Business leaders are also less positive about their own prospects, with more than half saying the economic climate in the UK is having a negative impact on their organisation, along with rising energy costs and skills shortages.
The IoD’s economic confidence index, which measures business leaders’ views on the UK’s economic prospects, was at a record low of -54 in July, up slightly from -60 in June. Sixty-nine percent of bosses were very or very pessimistic about the UK economy, while only 15% were optimistic about the outlook.
Inflation, now at a 40-year high, was the most common reason for discouragement, cited by a third of firms. Almost 20% of pessimistic bosses said problems in the UK’s trade relationship with the EU were their main concern, as the introduction of customs controls and delays at the border hampered exports.
The institute’s chief economist, Kitty Usher, warned that “risks in the macro economy continued to drive the behavior of business leaders in July, with inflation, our relationship with the European Union and political uncertainty causing investment objectives to stop.” of directors.
Official data Business investment has stalled since the 2016 EU referendum. It fell at the start of the Covid-19 pandemic and was below 9.1% earlier this year before the outbreak.
Usher is concerned that business leaders’ confidence in their own prospects may be waning soon, “that will have to be seen in the coming months,” he said.
The survey was conducted from July 13 to 28, as the Conservative Party leadership race to replace Boris Johnson begins.
The IoD says the “new political leadership team set up in the autumn” should include stronger incentives for businesses to invest as part of a clear economic strategy to improve business confidence.
Liz Truss, currently the front-runner to become the next Prime Minister, has promised to introduce low-tax and light-regulated investment zones across the UK if she comes to power. Rishi Sunak, the former chancellor who introduced “excessive” tax breaks for business investment, has pledged to reduce the number of boarded-up high street shops by helping local authorities quickly snap up and restore empty commercial buildings.
Firms are struggling to recruit and retain workers as families are squeezed by the cost of living. A fifth of medium-sized businesses said recruitment and retention issues were their biggest concern, according to a poll by accountancy and business consultancy BDO.
About half of companies say they are offering new benefits to employees, such as childcare support, free meals at work or shopping vouchers. More than four in 10 are giving co-workers one-time bonuses, as prices increase before salaries.
BDO also warns that some businesses have been forced to pause their recruitment and growth plans, with 21 per cent cutting headcount and a fifth slowing all new investment. A quarter is taking on more debt, which could be more expensive to service as borrowing costs rise.
“Inflation and inflation have put a lot of pressure on business leaders,” said BDO LLP partner Kaley Crosthwaite. “It’s particularly worrying to see businesses taking out more loans and borrowing to control costs – despite rising interest rates.”
The Bank of England is expected to raise interest rates again on Thursday as it tries to control inflation. Some City economists predict the BOE may raise the bank rate by 50 basis points to 1.75%, up from 25 basis points in the previous five meetings.
“The short-term outlook for inflation is distorted,” said Investec chief economist Philip Shaw, who predicted the bank would receive its first half-point increase since independence 25 years ago.
“We expect CPI inflation to be above 12 percent before the strong gas prices pull back now. We expect the committee to fear a broader shift to other prices and a stronger wage response,” he said.
