UK business leaders are scaling back investment plans as rising prices, Brexit trade difficulties and political uncertainty all leave bosses pessimistic about the economic outlook.
According to the latest Institute of Directors survey of business leaders, as many firms are now planning to cut investments and increase them. This is the weakest reading since October 2020 as nervous firms hold back on spending.
UK business investment intentions have fallen steadily since the start of the year as input costs have risen and the economy has slowed, undermining efforts to boost productivity.
Business leaders are also less optimistic about their prospects, with over half saying that economic conditions in the UK are 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’ view of the UK’s economic prospects, remained very low at -54 in July, only slightly higher than June’s -60. Sixty-nine percent of bosses were either very or fairly pessimistic about the 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 trade relationship with the EU were their main concern, as the introduction of customs controls and border delays have hampered exports.
“Perceived risks to the macro economy continued to drive business leaders’ behavior in July, with concerns about inflation, our relationship with the EU and political instability putting investment targets increasingly on hold,” warned Kitty Ussher. , chief economist at the Institute. of Directors.
Official data showed business investment stagnated after the EU referendum in 2016. 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 prospects, saying: “That’s one to watch in the coming months.”
The poll was conducted from July 13 to 28, when the Conservative party leadership contest to replace Boris Johnson began.
The IoD says the “new political leadership team being 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 pledged to introduce low-tax, lightly regulated investment zones across the UK if she comes to power. Rishi Sunak, the former chancellor who introduced a “super-rebate” tax break for business investment, is promising to cut the number of high street shops by helping local authorities quickly snap up and re-use empty commercial buildings.
Firms are also struggling to hire and retain staff as families are squeezed by the cost of living crisis. A fifth of medium-sized businesses said recruitment and retention problems are the biggest threat they face, according to a survey by accountancy and business advisory firm BDO.
Almost half of firms say they are offering new in-kind benefits to staff, such as childcare support, free work food or shopping vouchers. Over four in 10 are offering one-off bonuses to colleagues as wages rise ahead of wages.
The BDO also warns that some businesses have been forced to halt their hiring and growth plans, with 21% cutting 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 rise.
“Inflation and rising costs have put deep pressure on business leaders,” said Kaley Crossthwaite, partner at BDO LLP. “It is particularly worrying to see businesses taking out 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 curb inflation. Some City economists predict the BoE could raise the bank rate by 50 basis points to 1.75%, having already raised rates by 25 basis points in the last five meetings.
“The near-term outlook for inflation has worsened,” said Investec chief economist Philip Shaw, who predicts the Bank will agree to its first half-point hike since it was granted independence 25 years ago.
“Stronger gas prices now mean we expect CPI inflation to peak above 12% in October before easing again. Our expectation is that the committee may fear a wider spread to other awards and a more aggressive wage response,” Shaw added.
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