Significant decline of key economic indicators

06 Oct 2022

Published in: British Chambers of Commerce News

---

Four in ten businesses believe their profitability will reduce over the next 12 months

---

 Four in ten (39%) businesses believe their profitability will reduce over the next 12 months

• Fewer businesses are reporting increased sales; only 33% of firms reported increased domestic sales, down from 41% last quarter.

• Measures for inflation remain at record highs as more than four in five (84%) firms say it is a growing concern for them

The BCC’s Quarterly Economic Survey (QES) for Q3 2022 shows a significant decline of key economic indicators, with weakening structural business conditions and confidence a cause for concern.

The QES is the UK’s largest independent survey of business sentiment and a leading indicator of UK GDP growth.

The survey took place between August 22 and September 16, prior to the Government’s energy support package for firms and the mini-budget announcement.

The survey of over 5,200 firms – 92% of whom are SMEs – reveals there have been significant declines for indicators of business sales, cashflow, and profit expectations.

All indicators of business conditions and confidence have fallen significantly from Q2

More businesses are now seeing their cashflow decreasing, instead of increasing.

One in three (32%) firms reported reduced cashflow over the last three months, while 23% reported an increase.

Indicators for business confidence have plummeted; less than half (44%) of firms expect their turnover to increase over the next 12 months, while 25% expect a decrease.

Those expecting an increase are down ten percentage points from 54% in Q2. Profitability confidence has dropped to an even lower level; only one in three (33%) businesses believe their profits will increase over the coming year, while 39% now expect a decrease.

This is the lowest level since Q4 2020 at the height of the Covid crisis.

Unsurprisingly, firms are not upping investment in their business. Only 22% reported an increase to plant/equipment investment in the past three months, while 57% reported no change, and 22% reported a decrease.

Business activity is taking a hit, with fewer firms reporting increased sales Only 33% of firms reported an increase in domestic sales over the past three months, a sharp decline from the Q2 level of 41%. 24% of firms reported a decrease in sales.

The outlook is particularly bleak for the retail and wholesale sector. The sector is now in its second quarter of negative territory; with far more businesses reporting a decrease in sales rather than an increase.

25% of retail/wholesale firms reported an increase in domestic sales, while 39% reported a decrease.

Alongside the retail and wholesale sector, other sectors are also struggling; almost three-quarters (71%) of hospitality businesses reported they are operating below capacity. Inflationary pressures are showing no signs of letting up

The percentage of firms expecting their prices to rise over the coming months (62%) remains close to last quarter’s record high. 84% of firms also cite inflation as a growing concern to their business – by far the highest level on record.

A rising proportion (37%) are also worried about interest rates.

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: “This quarter’s results point to a significant decline in business confidence, with a clear shift downwards in many of the key indicators we track. Every sector has seen a falling proportion of firms reporting increased domestic sales, with the retail and wholesale sector particularly affected.

“Diminishing sales coupled with soaring inflation is a toxic mix, and many firms are no longer looking to the future with optimism. Profitability and turnover confidence for the next year have dipped significantly since last quarter. Both measures are heading towards levels not seen since the onset of the Covid crisis.

“While the subsequent energy announcement will have alleviated immediate pressure on firms' energy bills, confidence will have taken a further hit following the market reaction to the mini-budget.

“Many firms are caught in the pincer movement of soaring inflation and rising interest rates. The devaluation of the pound has also added a huge cost base for businesses reliant on imports. “Businesses now desperately need to see economic stability in order to rebuild the confidence to invest.” 

Responding to the findings, Director General of the British Chambers of Commerce, Shevaun Haviland, said: “This survey was concluded before the Government’s energy price package for businesses and the mini-budget. However, our findings paint a worrying picture of the state of affairs at many UK firms. Almost every key business indicator is trending downwards – sounding alarm bells across all sectors and regions.

“Sales and cashflow are down, firms are operating below capacity, and the number of businesses expecting to see their profits increase is falling.

“Unsurprisingly, inflation remains the top external factor of concern for businesses. Some firms are telling us that they have been forced to cancel otherwise viable projects, due to soaring costs.

“In addition to the long-term structural challenges facing businesses, events over the last few weeks will have added to firms’ worries. The current volatility in the financial and currency markets must be speedily addressed to return stability to the economy and give business some certainty to plan.

“We have welcomed the move from Government to reverse the National Insurance Contributions (NICs) increase, which will put money back into people’s pockets immediately; and the Annual Investment Allowance (AIA) now permanently set at £1m to help incentivise growth.

“The six months energy package for businesses is a step in the right direction, but we need a longer-term plan if the government is serious about helping businesses during this energy crisis. Time is of the essence.

“The Government must now rapidly present more detail on its fiscal policies and supply side reforms, particularly at a time when businesses are faced with rising interest rates and high inflation.

“Businesses understand the economy will not fix itself overnight, but they do expect a long-term plan. We urge the Government to provide more certainty by bringing forward the publication of their Fiscal Plan. The sooner they do this, the sooner markets and businesses will understand what the long journey to stability will look like.”