Confidence falls back as businesses become more cautious

This morning, ICAEW has published its Q3 UK Business Confidence Monitor which covers the period of the general election and the start of the Brexit negotiations with the European Union.

Not unsurprisingly, confidence has fallen back into negative territory reversing the upward trend experienced over the last twelve months. Our Business Confidence Index now stands at -8.0, falling from +6.7 in Q2.

What the underlying data suggests is that British businesses are adopting a more cautious, wait and see approach to the future. Whilst many of the businesses I speak to are doing well, I am getting a sense of unease fuelled by the uncertainty created by a hung parliament, a minority government and the hesitant start to the Brexit negotiations.

Adopting a wait and see approach

Growth in capital investment is slowing and is forecast to remain below the levels of 2014 and 2015. Similarly, investment in staff training and research and development growth is  weakening. Businesses are just not investing at the levels needed to maintain the growth that the UK economy has experienced over recent years.

Businesses don’t appear to be taking advantage of the depreciation of the pound to target new export markets. Whilst export growth has been maintained, there’s little sign of more companies setting out to conquer new worlds.

Wage growth is being held below inflation as businesses seek to control overall cost rises, including a 2.5% rise in input prices. Household incomes will continue to be squeezed with inflation forecast to peak later this year.

Priorities for the rest of the year

One thing I would like to see before the end of this year is the Government to set out the type of transitional arrangements it will seek alongside the Brexit negotiations so that businesses can start preparing now for their post-Brexit future. I would also like to see the introduction of an export incentive for SMEs, in the form of professional advice, that will help them take advantage of new trade opportunities resulting from Brexit.

Businesses cannot be passive. Now is the time to be investing in workforces, products and services to ensure that they are positioned to take advantage of the opportunities that will be there once the UK leaves the EU in March 2019.