A view of skyscrapers
Wage costs are now the primary source of cost increases, according to reports. MURAD SEZER/Reuters

According to the British Chambers of Commerce's (BCC) Quarterly Economic Survey (QES) for Q2 2023, just below half of businesses plan to raise prices in the next three months as cost pressures relax.

However, the data also shows that wages are now the primary source of cost increases, rather than power bills or raw materials.

The BCC's Insights Unit survey of over 5,000 enterprises – 92 per cent of which are small and medium-sized enterprises (SMEs) – also finds that business performance varies significantly across sectors, with hospitality and retail firms suffering the most from cash flow issues.

The study was conducted between May 15 and June 9, just before the Bank of England raised the base rate to 5 per cent. Respondents were divided into 27 per cent manufacturing, 73 per cent services, and 47 per cent exporting industries.

Business activity continues to grow slowly, with no notable change in sales or cash flow figures, according to BCC. The percentage of businesses reporting increasing domestic sales remained relatively stable, at 35 per cent (about unchanged from 34% the previous quarter). In the meantime, 24 per cent reported a reduction, while 41 per cent reported no change.

In terms of cash flow, more companies continue to report a drop rather than an increase, and the picture has remained basically stable since Q1. Just over one-quarter (26%) of businesses reported an increase in cash flow during the last three months (25% in Q1), while 29 per cent reported a drop (30% in Q1).

Retail and hospitality remain the most stressed industries, with 38 per cent and 37 per cent reporting reduced cash flow, respectively, while PR and marketing were the most upbeat, with 33 per cent reporting an increase.

According to BCC's survey, after showing signs of a resurgence in Q1 2023, business confidence has now stopped once more. The percentage of businesses expecting their business turnover to expand over the next 12 months increased somewhat, rising to 54 per cent from 52 per cent in Q1.

Profitability confidence increased slightly to 44 per cent in Q2 from 42 per cent in Q1, although it remains lower than turnover confidence. The BCC reported that it continues to remain weaker than turnover confidence.

The percentage of respondents reporting an increase in plant and equipment investment fell to 23 per cent in Q2 from 25 per cent in Q1. This indicator has plummeted to as low as 9 per cent of enterprises at the onset of the epidemic over the last six years, but it has never risen over 28 per cent (Q1 2018).

The survey further revealed that for the first time since the third quarter of 2021, the percentage of businesses anticipating their pricing to rise dipped below 50 per cent. It has decreased from 60 per cent in Q4 2022 to 45 per cent in Q2 2023.

While inflation remains the top issue for businesses, the survey found out that it has fallen for the second quarter in a row, with 69 per cent of businesses concerned, down from 74 per cent in Q1. However, there has been a 5 percentage point increase in firms concerned about interest rates, rising from 36 per cent in Q1 to 41 per cent in Q2.

Labour costs are currently the most significant cost pressure for firms, BCC revealed. With concern about utility costs declining (63% report them as an issue in Q3 2022, up from 74% in Q1), the number of businesses battling with wage costs has climbed to 68 per cent (67% in Q1), making it the leading cost constraint.

However, the report noted that there are significant sectoral discrepancies, with 75 per cent of manufacturers citing raw materials as the primary driver of price rises, while 85 per cent of hospitality firms were most concerned about electricity prices. The retail sector was the least concerned about labour costs, with 56 per cent mentioning it as a concern, compared to 64 per cent citing utilities and 67 per cent bothered about raw materials.

According to David Bharier, Head of Research at the British Chambers of Commerce (BCC), the Quarterly Economic Survey data show no significant improvement in key business indicators. He stated that three years of economic shocks in the form of COVID-19 lockdowns, inflation, and new trade barriers with the EU have created significant barriers to firms' ability to trade and grow.

According to him, as borrowing costs rise as interest rates rise, many SMEs face additional pressure. Investment suffers predictably in such difficult conditions, he added.

Bharier stressed that despite this, business confidence remains high, despite a significant drop in 2022 as inflationary pressures ease further. This optimism should be bolstered by greater clarity from the administration on an economic growth strategy, he noted.

Shevaun Haviland, Director-General of the British Chambers of Commerce, responded to the findings, saying with inflationary pressures easing and wage cost concerns persisting, their research should give the government and Bank of England pause for thought on their next steps.

Haviland stressed that there is a delicate balancing act to be performed here. He warned that if interest rates are raised too aggressively, there is a significant risk that the long-term outlook for economic development and prosperity would be harmed.

The Bank of England has identified a tight labour market as a major contributor to the UK's stubbornly high inflation, Haviand stated, adding that due to fierce competition for skills, wage demands, and candidate expectations, many businesses are left with job vacancies that they cannot fill.

Advising the UK government, the director-general of BCC stated that they must step up efforts to re-employ people and create the right conditions for employers to invest in employee training and development. A flexible, efficient, and economical immigration system is critical where enterprises cannot recruit and train from their local or national labour market, according to him.

Haviland stated that further changes in trade with the EU, such as new customs restrictions and import tariffs, will further put higher pressure on costs. He advised that the government must exercise caution when introducing new charges to enterprises that are already under stress.

In response to the survey findings, several businesses shared their experiences. Bedfordshire construction company of medium size said: "We have the highest order book ever, but not enough staff to deliver it."

Cumbrian medium-sized manufacturers said the UK's shortage of skilled workers, particularly welders and engineers, has had a significant impact on the business. Similarly, a small Cambridgeshire manufacturer also said the overall economy appears to be in a state of stagnation.

This is good for inflation, but it is bad for corporate growth and trading possibilities. We are starting to see firm closures in our sector, which could be a symptom of a larger crisis that will emerge if the economy does not improve soon.