Inflation pressure easing according to British Chambers of Commerce survey

The BCC’s Quarterly Economic Survey for Q2 2023 shows that less than half of firms now plan to raise prices in the next three months as cost pressures ease.

But the data also reveals that the main factor for increasing costs is now coming from wages rather than utility bills or raw materials.

The survey, by the BCC’s Insights Unit, of over 5,000 firms – 92% of whom are SMEs – also reveals business performance across different sectors varies considerably, with hospitality and retail firms suffering more widely from cashflow difficulties.

The research took place between 15 May and 9 June and before the Bank of England increased the base rate to 5%. Respondents were split into 27% manufacturing and 73% services industries, with 47% exporting.

Growth in business activity remains weak, with no significant improvement to sales and cashflow data.

The percentage of firms reporting increased domestic sales remained largely static, with 35% reporting a rise (broadly unchanged from 34% last quarter). Meanwhile 24% reported a decrease and 41% reported no change. 

For cashflow, more businesses continue to report a decrease, rather than an increase and again the picture remains largely unchanged since Q1. Just over one in four (26%) businesses said their cash flow has increased over the last three months (25% in Q1), while 29% have seen it decrease (30% in Q1).

Pressures remain highest in the retail and hospitality sectors with 38% and 37% respectively reporting reduced cashflow, while PR and Marketing was the most positive sector with 33% reporting growth.

After business confidence showed signs of a rebound in Q1 2023, it has now stalled again.

There was a small increase in the percentage of firms believing their business turnover will rise over the next 12 months, up to 54%, from 52% in Q1. 

Profitability confidence also improved slightly to 44% from 42% in Q1, but it continues to remain weaker than turnover confidence.

This slightly improved outlook is not translating through to increased business investment.

The number of respondents reporting an increase to investment in plant/equipment dropped to 23% from 25% in Q1. Over the last six years this measure has dropped as low as 9% of firms, at the start of the pandemic, but it has never gone higher than 28% (Q1 2018).

Inflationary pressures continue to ease but remain the top concern.

The percentage of firms expecting their prices to rise fell below 50% for the first time since Q3 in 2021. It has fallen from 60% of firms in Q4 2022 to 45% in Q2 2023.

While inflation remains firms’ biggest concern, the level has dropped for the second quarter running, with 69% of firms now worried compared to 74% in Q1. However there has been a corresponding 5 percentage point rise in businesses worried about interest rates, increasing from 36% in Q1 to 41% in Q2.

Labour costs are now the number one cost pressure for businesses.

With concern around utility costs dropping, 63% report these as an issue (74% in Q3 2022), the number of firms struggling with wage costs has risen to 68% (67% in Q1) and is now the lead cost pressure.

But there remain wide sectoral differences with 75% of manufacturers citing raw materials as the main factor driving price increases, while in hospitality, 85% of firms were most worried about utility costs. The retail sector was least worried about labour costs, with 56% citing it as an issue, against 64% flagging utilities and 67% raw materials.

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: “Once again, data from the Quarterly Economic Survey sees no major improvement to key business indicators.

“Three years of economic shocks in the form of Covid-19 lockdowns, inflation, and new trade barriers with the EU have placed clear obstacles in the ability of firms to trade and grow.

“Now many SMEs face further pressure following interest rate rises, as borrowing costs increase. Predictably, investment suffers in such tough conditions.

“Despite this, business confidence remains buoyant, following a big drop in 2022, as inflationary ease further. This optimism should be reinforced with greater clarity from government on a plan for economic growth.”

Responding to the findings, Director General of the British Chambers of Commerce, Shevaun Haviland (pictured), said: “With inflationary pressures weakening, but wage cost concerns remaining high, our research should give the Government and Bank of England pause for thought on their next steps.

“There is a fine balancing act to be struck here. Push too hard on interest rates and there is a real danger that the long-term outlook for economic growth and prosperity will be dented.

“The Bank of England has itself identified the tight labour market as a key factor in the UK’s stubbornly high inflation.

“Fierce competition for skills, wage demands and candidates’ expectations leave many businesses with job vacancies they can’t fill.

“The Government must redouble its efforts to get people back into work and create the right conditions for employers to invest in staff training and development.  Where firms cannot recruit and train from their local or national labour market, a flexible, efficient and affordable immigration system is crucial.

“Further upcoming changes on trade with the EU, such as new customs requirements and charges for imports, will also add upward pressure on prices. We need to think carefully about adding in further costs for businesses when they are already under strain.”