UK business leaders are slashing investment plans as soaring prices, Brexit trading difficulties and political uncertainty all leave bosses pessimistic about the economic outlook.
As many firms are now planning to cut investment as to increase it, according to the Institute of Directors’ latest poll of business chiefs. That is the weakest reading since October 2020, as nervous firms rein in spending.
UK businesses’ investment intentions have been falling steadily since the start of the year, as input costs have soared and the economy has slowed, undermining efforts to lift productivity.
Business leaders are also less upbeat about their own prospects, with over half saying economic conditions in the UK are having a negative impact on their organisation, along with soaring energy costs and skills shortages.
The IoD’s Economic Confidence Index, which measures business leaders’ view of UK economic prospects, remained very low at -54 in July, only slightly higher than June’s -60. Sixty nine per cent of bosses were either very or quite pessimistic about UK economy, while just 15% were optimistic about the outlook.
Inflation, now at a 40-year high, was the most common reason for pessimism, cited by a third of firms. Nearly 20% of pessimistic bosses said difficulties in the UK’s trading relationship with the EU were their main worry, as the introduction of customs checks and delays at the border have hampered exports.
“Perceived risks in the macroeconomy continued to drive the behaviour of business leaders in July, with concerns around inflation, our relationship with the EU and political instability causing investment intentions increasingly to be put on hold,” warned Kitty Ussher, chief economist at the Institute of Directors.
Official data has shown business investment stalled after the 2016 EU referendum. It then plunged when the Covid-19 pandemic began, and was still 9.1% below pre-pandemic levels earlier this year.
Ussher is also concerned by a recent weakening in business leaders’ confidence in their own prospects, saying: “This is one to watch in future months.”
The IoD says that the “new political leadership team that is established in the autumn” needs to include stronger incentives for businesses to invest, as part of a clear economic strategy to improve business confidence.
Liz Truss, currently the frontrunner to become the next prime minister, has pledged to introduce low-tax, light-regulation investment zones across the UK if she came to power. Rishi Sunak, the former chancellor who introduced a “super deduction” tax break for business investment, is promising to cut the number of boarded up high street shops by helping local authorities quickly seize and repurpose empty commercial buildings.
Firms are also struggling to hire and hold on to staff, as households are squeezed by the cost of living crisis. A fifth of mid-sized businesses said recruitment and retention problems are the biggest threat they face, according to a poll by accountancy and business advisory firm BDO.
Almost half of firms say they are offering new benefits in-kind to staff, such as childcare support, free meals at work or shopping vouchers. Over four in 10 are providing one-off bonuses to colleagues, as prices soar ahead of wages.
BDO also warns that some businesses have been forced to pause their hiring and growth plans, with 21% reducing headcount and a fifth freezing all new investment. A quarter are taking on more debt, which could become more expensive to service as borrowing costs increase.
“Inflation and rising costs have placed profound pressure on business leaders,” said Kaley Crossthwaite, partner at BDO LLP. “It is particularly concerning to see businesses taking on additional loans and credit to manage costs – despite rising interest rates.”
The Bank of England is expected to raise interest rates again on Thursday, as it tries to rein in inflation. Some City economists predict the BoE could lift Bank Rate by 50 basis points to 1.75%, having already increased rates by 25 basis points at the last five meetings.
“The short-term outlook for inflation has deteriorated,” said Investec’s chief economist, Philip Shaw, who predicts the Bank will agree its first half-point increase since being granted independence 25 years ago.
“Stronger gas prices now mean that we expect CPI inflation to peak above 12% in October before easing back. Our expectation is that the committee may fear a wider spillover into other prices and a more aggressive wage response,” Shaw added.
Read more:
UK businesses slash investments due to soaring prices and Brexit
