Business confidence stalls as inflation, logistics costs take hold

More than two-thirds (70%) of UK businesses are still confident about growth over the next three years, but this confidence has stalled on the back of biting inflation and soaring logistics costs, according to the latest Santander Trade Barometer.

The survey, which saw YouGov poll more than 1,000 businesses between 23 August and 10 September 2022, shows that confidence has fallen for the first time since it hit a low of 59% in autumn 2020, with fears around high interest rates, inflation, energy costs and UK economic conditions starting to materialise.

Inflation fears have moved to centre stage, with another sharp spike in concern, up to 62% (from 43% in spring this year). Going hand-in-hand with this, concerns about interest rate rises have grown sharply, hitting 35%, compared to just 26% six months ago.

Rising energy costs are now a concern for over half (57%) of businesses and 52% of businesses worry an economic slowdown in the UK will cause them problems, with fears for the global economic climate (42%) growing too.

A common response to these negative impacts is for businesses to increase the price of their products and services (49%). Three-quarters of businesses say the costs of goods and materials have increased in the past month and the same expect these costs to rise next year.

Rising energy costs (56%), alongside labour (47%) and transportation costs (43%), are also concerns. Delays in goods reaching them (for 61% of businesses) amplify the concerns. Rising input costs are affecting manufacturing businesses the most and rising transportation costs are impacting wholesale and retail businesses.

Falling confidence has impacted UK-only businesses more, with only 64% of these companies expecting growth versus 72% of international businesses. Confidence among regional businesses has fallen in all regions except Scotland, which has risen almost 10% from 69% to 78%. The South West and Wales saw the biggest fall, down 16% since spring 2022 to 63%.

Businesses surveyed have largely recovered from the Covid pandemic, with more than half of respondents (54%) saying that performance had accelerated over the last 12 months. A vast majority (86%) of businesses say they are well placed, or at least coping, in the current economic environment; however, 7% have said that they are now starting to struggle.

Investment plans remain resilient for now, with almost half (47%) of businesses planning to hire new staff, 43% investing in staff training, almost a third (31%) planning to invest in R&D, and over a quarter (26%) focusing on digital transformation – all up on the spring 2022 Trade Barometer figures.

“Faced with rising inflation, rising energy and transport costs, and a difficult winter trading season ahead, it’s reassuring to see UK companies continue to remain resilient as they head into a challenging operating environment,” said John Carroll, head of international and transactional banking at Santander UK. “But businesses need support to help them to navigate the challenges of rising costs, tough UK economic conditions, and delays in receiving goods.”

Opportunities ahead

Almost half (44%) of UK companies cite growth in both new and existing international markets as a key driver of recovery from the current challenges. Other drivers of growth include domestic growth (32%), diversification (29%) and digital growth (21%).

Looking at international markets, 40% of all businesses say that these have become more important due to current challenges, and 71% say that exporting will reduce their reliance on the UK economy. Almost two-thirds (64%) feel international markets have a greater potential than the UK, and almost a third (31%) say their products or services are better suited to non-UK markets.

The barometer also shows the ability to attract the right staff is regarded as the single most important factor driving growth over the next three years for the third consecutive barometer running (according to 73% of respondents). The macro-economic outlook in the UK (71%) is important too, alongside factors such as the wider EU and global economies (64%) and transport costs (64%).