The results of the British Chambers of Commerce’s (BCC) Quarterly Economic Survey (QES) for Q1 2023 show that while business confidence has improved from a very weak base, most firms see no improvement to business conditions.
The survey of over 5,200 firms – 92% of whom are SMEs – reveals a sectoral division in business performance, with hospitality and retail firms consistently more likely to report worsening cash flow, investment, and turnover than other sectors.
The research took place between February 13 and March 9, before the Chancellor’s Spring Budget was announced.
Growth in business activity remains weak, with retail and hospitality sectors facing most significant challenges
The percentage of firms reporting increased domestic sales has not seen any bounce back since it fell significantly in Q3 2022. Only one in three (34%) firms experienced an increase in sales over the past three months, while 24% reported a decrease and 41% reported no change.
The retail and hospitality sectors remain particularly weak. Almost two in five (38%) retail firms experienced a decrease in sales over the past three months, with one in three (32%) hospitality businesses reporting a fall.
More businesses continue to report a decrease, rather than an increase, in cash flow, highlighting the precarious state many SMEs are still in. Only one in four (25%) businesses said their cash flow has increased over the last three months, while 30% have seen it decrease.
The hospitality and retail sectors are again facing the greatest challenges. 40% of retail firms, and almost half (47%) of hospitality businesses, reported decreased cashflow.
After a significant fall in Q3 2022, business confidence is now on the up
After business confidence plummeted to historically low levels in the second half of 2022, there has been a marked improvement in sentiment in the first quarter of 2023. Over half (52%) of firms believe their business turnover will increase over the next 12 months, up from 44% in Q3 2022.
While profitability confidence has also improved, it continues to remain weaker than turnover confidence. 42% of businesses now expect their profits to increase over the next year, up from 34% in Q4 2022.
Little discernible improvement to business investment over past six years
Three quarters (75%) of respondents reported no increase to investment in plant/equipment. There has been little discernible improvement to investment over the past six years; only a quarter of firms planned to increase investment in Q1 2023, the same level as reported in Q2 2017.
Inflationary pressures continue to ease slightly, but still remain the top concern
Following a drop last quarter, the percentage of firms expecting their prices to rise shows further signs of easing, as it fell five percentage points from 60% in Q4 2022 to 55% in Q1 2023.
The overall level of concern regarding inflation has dropped for the first time in over two years. However, at 74%, the level remains close to the historical high.
Cost pressures are varied, but labour costs and utilities come out top overall
Cost pressures vary considerable across sectors; 87% of hospitality firms reported utilities as a factor driving price increases while 86% of manufacturers cited raw materials.
David Bharier, Head of Research at BCC, said: “After a significant decline in business confidence in the second half of 2022, results from QES Q1 show an improvement in business sentiment as political turmoil and inflationary pressures show some signs of easing.
“However, this comes from a very weak base, and while confidence has improved, this is yet to translate into an overall improvement of business conditions. Most SMEs still report no improvement to sales, cash flow, and investment.
“Three years of economic shocks – COVID lockdowns, global supply chain crises, inflation, and Brexit – have taken a significant toll on UK SMEs. The QES Q1 data once again confirms that these shocks have disproportionately impacted the retail and hospitality sectors, which are once again most likely to be reporting worsening sales and cash flow.”
Responding to the findings, Director General of the BCC, Shevaun Haviland, said: “Last month’s Budget included several positive measures for business, including increased childcare support as well as plans for full capital expensing. However, it did not go far enough to shift the dial on growth which remains stubbornly low.
“The Government failed to tackle some of the major issues holding firms back from their potential, in particular energy costs and the tight labour market which remain top business concerns.
“The Government’s new energy support package represents a drop of 85% in the financial help available to businesses. We reiterate our calls for increased, targeted support for those firms who desperately need it.
“The energy crisis faced by firms and households are two sides of the same coin. Yet, non-domestic customers do not enjoy the same protection as households.
“To ensure competition in the business energy sector, and solve market failures, Government must also ensure Ofgem has the necessary powers to properly regulate the industry.
“While we welcomed the Government’s decision to add five new construction jobs to the Shortage Occupation List, the lack of skilled labour is having a corrosive effect on our economy. This shift to a new system cannot come fast enough and other sectors facing huge recruitment pressures, such as hospitality, must be given help.”