British business sentiment dropped to its lowest level in a year in October, dragged down by fears of looming inflation and supply chain pressures that could undermine a sustained recovery from Covid disruption.
Inflation expectations among UK business leaders surge to a record high last month, with 66 per cent expecting non-staff costs to increase over the coming year – double the global average of 33 per cent, according to Accenture and IHS Markit’s latest business outlook survey.
Global supply chain concerns were the main driver behind the assumption that business expenses will spiral upwards, while the energy crisis further stoked fears.
But as the labour market tightens further and living costs mushroom, business leaders’ expectations that they will have to raise staff salaries also surged to a record high of 75 per cent – the highest level worldwide.
This, paired with ongoing concerns about an ability to hire skilled staff, led to a drop in firms’ confidence in hiring in the next 12 months to 32 per cent, down from a record high of 41 per cent in June.
As a result of these swelling costs, a record level of UK businesses are more willing to hike prices to protect margins. Accenture forecast a sharp increase in consumer prices over the coming year, as 60 per cent of the cross-sector firms surveyed said they were planning a rise.
This expectation was highest (76 per cent) among manufacturing companies, but even services firms largely (52 per cent) expect to charge customers more.
Confidence in demand
Despite these cost challenges, more than half (56 per cent) of the UK’s private sector firms are confident in an uptick in business activity in the next twelve months, while only 11 per cent expect a decline.
Although this is a slump compared with the last year and the highs seen during the summer as the UK economy opened up, the positive net score of 45 per cent still comes in higher than levels seen in the five years before the pandemic.
An expectation that demand will continue its recovery to pre-pandemic levels, paired with a rebound in international travel and optimism about growth in new post-Brexit export markets, were the key drivers behind UK business leaders’ positive outlook.
A positive score means more company directors are optimistic about the economy and the growth of their business than are pessimistic.
Businesses in the UK, where full lockdown ended four months ago and the vaccine rollout has been relatively swift, remained more confident than every other European country apart from Ireland. In the EU, the net balance was +38 per cent, while the “worldwide” score was +33 per cent .
“The high levels of business confidence we saw earlier this year have been tempered by some strong economic and unanticipated headwinds,” said Simon Eaves, UK Market Unit Lead at Accenture.
“Despite this, business optimism in the UK remains higher than in most other European nations and we must capitalise on this sentiment to inspire further growth across the economy.
“Supply chain challenges and labour shortages cannot be fixed overnight, but it is critical that business leaders adapt their operations and invest in the right technologies, such as cloud and data, and bring in the right skills to remain competitive.”