UK business confidence fell to its lowest level this year in October, according to the latest Accenture / S&P Global UK Business Outlook.
The net balance of firms expecting activity to increase over the next 12 months slid to +37% in October, down from +40% in June and +43% in February.
Although UK companies maintain a positive outlook for the upcoming year, the research suggests that concerns about the cost of living and elevated interest rates have tempered the positive effects of milder inflation. UK business optimism still remained relatively high compared to global (+25%) and European (+16%) average, which fell by 3% and 9% respectively.
Amid rising concerns over the effects of interest rate hikes on consumer spending and borrowing, optimism in the UK service sector fell to +36%. Hospitality businesses felt the brunt of this impact, standing out as the sole sub-sector that did not report a positive sentiment.
Manufacturers reported a modest increase in optimism (up to +44%), with notable positivity from the transport and food and drink sectors. Many manufacturers highlighted their expectations that new product launches, technological advancements, and reshoring prospects might bolster their output.
Ewan Mackay, Strategy and Consulting lead at Accenture in the UK & Ireland, said, “UK business respondents are more optimistic than firms in Europe and around the world.
“However, it’s no surprise that corporate confidence has wavered in the face of ongoing change, with wider economic challenges impacting interest rates and high prices putting a dent in consumer spending.”
“While projections for the next 12 months remain positive, it’s important that businesses take action now to turn expectations into reality even if the economic picture remains uncertain.
“Now is the time to stay the course with strategic investments where possible, hiring the best skills and embedding the right technologies throughout the core of their business to position them for future growth.”
Confidence fell despite declining inflation expectations in the UK. Firms indicated that weaker non-staff input cost inflation will lead to slower price increases. Expectations for input costs (+47%) and output prices (+43%) remain high but are still at their lowest since February 2021.
Reduced cost pressures, combined with predictions of steady business growth, boosted profit optimism. Notably, the UK was the only country monitored that saw an uptick in profit expectations in October.
Expectations for an increase in salary costs were up marginally to +73% from +72 in the summer, with UK businesses suggesting that efforts to increase employment and address skills gaps could sustain high wage inflation.
The survey reveals that UK companies anticipate a decline in research and development expenditure in the upcoming year (-4%). Companies highlighted the challenges posed by interest rate increases, making it difficult to maintain investment levels. Additionally, capital expenditure projections saw a downturn, with manufacturers being particularly affected.