Business confidence shows signs of recovery, however, challenging conditions persist

A raft of business sentiment surveys conducted in Q1 2023 showed an increase in confidence levels for the year ahead across a mix of industries and company size. Yet, it was also widely acknowledged that challenging market conditions persist.

The British Chambers of Commerce (BCC) Quarterly Economic Survey showed a marked improvement in sentiment in the first quarter of 2023 with 52% of firms believing their business turnover will increase over the next 12 months, up from 44% in Q3 and Q4 2022 (1).

However, more businesses reported a decrease, rather than an increase, in cash flow, highlighting the precarious state many companies are still in. Only one in four (25%) businesses said their cash flow increased in Q1 2023, whereas 30% saw it decrease. 

The retail and hospitality sectors remain particularly weak as consumers cut back on discretionary spending amid falling real wage: 40% of retail firms and almost half (47%) of hospitality businesses, reported decreased cashflow.

As a result, many businesses are cutting costs or in extreme cases closing down for good. For example, it’s estimated that more than 12 hospitality venues shut each day over the year to March 2023 (2). Many of these companies blamed inflation, saying rising costs made it impossible for them to make a profit.

Another survey based on interviews among members of the Institute of Chartered Accountants in England and Wales (ICAEW) revealed that business confidence is back into positive territory for the first time in a year (3).  

At +2.5, confidence is fragile with companies expressing serious concerns over their future sales against a backdrop of high inflation and interest rates. There are also worries over how tight government fiscal policy will need to be in the months and years ahead.

Companies in the construction and property sectors are the least confident, whereas manufacturers are now among the more confident businesses.

The ICAEW points out that one of the greatest challenges facing businesses is customer demand, amid the continued cost-of-living squeeze.

Deloitte’s Q1 2023 survey of CFOs, which is based on the opinions of finance directors of major corporates in the UK including FTSE 100 and FTSE 250 companies, reported a significant improvement in sentiment in the first quarter (4).

CFOs’ perceptions of external financial and economic uncertainty have fallen. Brexit and high energy prices or disrupted energy supply pose a significantly lower risk to businesses than in Q4 2022.

Although CFOs reported an improvement in credit availability, they also acknowledged a rise in the cost of credit, which is now at an all-time high since the 2008/2009 financial crisis.

Whilst sentiment has bounced back, CFOs maintain a defensive strategy stance. Risk appetite is below normal levels and CFOs are heavily focussed on building up cash and reducing costs.

Following three years of economic shocks – Covid lockdowns, global supply disruptions, inflation (largely driven by rising energy costs), interest rate increases, higher taxes, a fall in the value of the pound and Brexit – the cost of doing business is taking a significant toll on businesses.

The number of companies declared insolvent in England and Wales in the first three months of 2023 was up 18% on a year earlier and remained close to the 13-year high recorded in the final quarter of 2022 (5).

(1)BCC Quarterly Economic Survey: Despite uptick in business confidence, most firms see no improvement to sales, British Chambers of Commerce 4 April 2023 https://www.britishchambers.org.uk/news/2023/04/bcc-quarterly-economic-survey-despite-uptick-in-business-confidence-most-firms-see-no-improvement-to-sales

2)Hospitality loses 4,600 venues in 12 months, but closures slow in early 2023, Hospitality Market Monitor from CGA by NIQ and AlixPartners 2 May 2023 https://cgastrategy.com/hospitality-loses-4600-venues-in-12-months/

3)UK Business Confidence Monitor Q1’23, Institute of Chartered Accountants in England and Wales 19 April 2023 https://www.icaew.com/technical/economy/business-confidence-monitor/business-confidence-monitor-national

4)Deloitte CFO survey Q1 2023, April 2023 https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html

5)Company Insolvency Statistics Q1 2023 England and Wales, The Insolvency Service 28 April 2023 https://www.gov.uk/government/statistics/company-insolvency-statistics-january-to-march-2023