UK companies cut investment due to rising prices and Brexit | business

UK business leaders cut investment plans as rising prices, Brexit trade difficulties and political uncertainty leave bosses pessimistic about the economic outlook.

According to the Institute of Directors’ latest survey of business leaders, as many companies are now planning to cut back as they are to increase. It’s the weakest reading since October 2020 as nervous companies rein in spending.

UK companies’ investment intentions have fallen steadily since the start of the year as input costs have soared and the economy has slowed, undermining efforts to boost productivity.

Business leaders are also less optimistic about their own prospects, with more than half saying economic conditions in the UK are negatively impacting their organization alongside rising energy costs and skills shortages.

The IoD’s Economic Confidence Index, which measures business leaders’ perception of the UK’s economic outlook, remained very low at -54 in July, up only slightly from June’s -60 reading. 69% of chiefs were either very or fairly pessimistic about the UK economy, while only 15% were optimistic about the outlook.

Inflation, now at a 40-year high, was the most common reason for pessimism, cited by a third of companies. Almost 20% of pessimistic bosses said difficulties in the UK’s trade relationship with the EU were their top concern, as the introduction of customs controls and border delays had hampered exports.

“Perceived risks in macroeconomics continued to guide business leaders’ behavior in July, with concerns about inflation, our relationship with the EU and political instability increasingly putting investment intentions on hold,” warned Kitty Ussher, chief economist at the Institute of Directors .

Official data shows that business investment has stalled after the 2016 EU referendum. It then plummeted when the Covid-19 pandemic began, and earlier this year was still 9.1% below pre-pandemic levels.

Ussher is also concerned about the recent weakening of corporate leaders’ confidence in their own prospects, saying “This is one to watch over the coming months.”

The poll took place from July 13-28, as the Conservative party leadership’s race to replace Boris Johnson began.

The IoD says the “new political leadership team that will be formed in the autumn” must include stronger investment incentives for companies as part of a clear economic strategy to boost business confidence.

Liz Truss, currently the frontrunner on the road to the next prime minister, has pledged to introduce low-tax and easy-investment zones across the UK if she takes power. Rishi Sunak, the former chancellor who instituted a “super deduction” tax break for business investments, promises to reduce the number of boarded-up high street businesses by helping local authorities quickly seize vacant commercial buildings and repurpose them.

Businesses are also struggling to hire and retain staff as households are squeezed by the cost of living crisis. According to a survey by the accounting and business consulting firm BDO, a fifth of medium-sized companies said that hiring and retention problems are the biggest threat to them.

Almost half of companies say they offer their employees new in-kind benefits such as childcare, free meals at work, or shopping vouchers. More than four out of ten offer colleagues one-time bonuses as prices exceed wages.

BDO also warns that some companies have been forced to pause hiring and growth plans, with 21% cutting headcount and a fifth freezing all new investment. A quarter are taking on more debt, which could become more expensive to service if borrowing costs rise.

“Inflation and rising costs have put a lot of pressure on management,” said Kaley Crossthwaite, Partner at BDO LLP. “It is of particular concern that companies are taking on additional borrowing and borrowing to control costs – despite rising interest rates.”

The Bank of England is expected to hike interest rates again on Thursday as it tries to rein in inflation. Some city economists are predicting that the BoE could hike interest rates by 50 basis points to 1.75%, having already hiked rates by 25 basis points in the last five meetings.

“The near-term outlook for inflation has deteriorated,” said Investec chief economist Philip Shaw, who predicts the bank will agree its first half-point hike since independence 25 years ago.

“Stronger gas prices now mean we expect CPI inflation to peak above 12% in October before easing again. We anticipate the committee could fear broader spillover to other awards and a more aggressive wage response,” Shaw added.

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