Julia Irvine 4 Nov 2019 01:52pm

Business confidence hit by Brexit malaise

Business confidence has slumped to its lowest point in the past 10 years, according to the latest ICAEW Business Confidence Monitor

The index is now registering -20.6 in Q4, compared to -10.3 in Q3, the lowest it’s been since Q3 2008, in the wake of the financial crisis.

The current negative outlook is largely because of businesses’ concerns over the ongoing Brexit uncertainty, although political instability and global factors such as the trade war between the US and China have also played their part.

ICAEW chief executive Michael Izza says that the General Election presents a potential government with an opportunity to explain how they might tackle the challenges that both businesses and society in general face on a daily basis.

“We want to see policies to harness the technological innovation that will drive national productivity, public finances that can deliver the infrastructure needed to support a modern economy, and the UK leading the way towards a zero-carbon future,” he said.

Businesses remain reluctant to invest heavily, given the uncertainties. Capital expenditure was up by just 1.9% over the previous 12 months, lower than the increase in sales volumes (3.4%) and the increase in profits (2.7%).

A majority of companies (53%) reported that they were operating below capacity, compared to just 5% that were running above capacity, which inevitably reduces the need to invest in capital equipment.

Companies’ inventory levels remain high following the stockpiling they did ahead of the no-deal Brexit that might have happened in March this year. As the BCM points out, the stocks will help to protect the companies if Brexit results in supply chain problems. Alternatively, companies will limit future production while they reduce the stockpiles.

The general unwillingness to invest has also spread to employment where growth is muted. This is particularly so in manufacturing where the rise in employment in Q4 is just 0.8% compared with Q2 2018. In the retail and wholesale sector, the level was not much higher, at 0.5%.

In contrast, the most resilient sector across most metrics, IT and communications, experienced a 4.2% rise in payrolls, with companies recruiting and retaining staff in order to keep pace with demand.

As a result of the slow employment growth, pay growth was moderate. At 2.2%, total salaries are rising at the same rate as a year earlier, and only slightly faster than the year before. ICAEW suggests that this may partly reflect a gradual downward trend in the number of companies which say that availability of skills is a growing challenge for their businesses.

The indications are that employment growth will remain slow over the coming  year. Businesses expect it to rise by just 1.3%, their weakest prediction since Q4 2012.

Company profits are another area where businesses anticipate slow growth. Over the last year, profits rose by only 2.7% and expectations of early improvement have fallen on the back of modest sales growth, a profit margin squeeze and stalling productivity.

“Looking ahead,” ICAEW said, “companies anticipate a modest improvement in profits growth, continuing the well-established trend. Selling prices are expected to rise by just 1.% in the next 12 months, so well below input prices (1.8%) and salary costs (1.9%). And sales growth is predicted to remain modest. As a result, hopes of a modest improvement in profit growth to 3.3%, may be hard to achieve.”