UK business optimism continued to strengthen midway through the year, as expectations of a strong recovery enabled firms to plan a record increase in staffing levels over the next 12 months, according to the Accenture/IHS Markit UK Business Outlook.
Two thirds of UK private sector firms (67%) expect an increase in business activity during the year ahead, compared to just 9% that project a reduction. At +58% in June, the resulting net balance of business expectations rose to its highest level in six years.
Improved activity expectations paved the way for another robust profits forecast, with a net balance of +37% of firms expecting profits to increase over the coming year.
As a result, UK firms increasingly made plans to boost business investment and increase employment. Staff hiring plans were particularly strong, with a record net balance of +41% of companies expecting to increase employment in the coming year.
June data indicated that most firms had seen a recovery in business activity from the COVID-19 pandemic, with approximately 51% of survey respondents stating that output was the same or higher than February 2020 levels. Notably, almost two-thirds of construction firms reported a recovery in output, compared with 62% of manufacturers and 49% of services firms.
Commenting on the survey, Rachel Barton, Strategy & Consulting lead at Accenture UK & Ireland, said: “Despite continued uncertainty, it is hugely encouraging that confidence remains high amongst British businesses. However, the most positive signal is that the confidence appears to be translating into action, with companies now hiring and investment plans at a high point.
“The challenge for business is to invest in a way that inspires sustainable growth by hiring people with the right skills and investing in the right technologies that will deliver for the long term.”
Capital expenditure and research & development plans also strengthened, improving to the highest for six years with net balances of +20% and +11% respectively. Investment forecasts remained stronger among manufacturing firms, though service providers also saw a further marked improvement from the record lows recorded a year ago.
After topping the list for business activity in February, hotels & restaurants saw a steep drop in optimism amid expectations that the post-reopening jump in demand will cool off, while staff shortages and rising prices were also highlighted as possible risks to growth. On the manufacturing side, the transport and food sectors saw the largest improvements in output expectations, while sectors that have been severely impacted by global supply issues recorded a drop in confidence, including timber, metals and textiles producers.
Inflationary pressures – a potential sting in the tail?
Supply-side risk factors led to increasing concerns about inflation among UK businesses, as approximately 60% of surveyed firms expect non staff costs to increase, compared to just 5% that forecast a reduction. The resulting net balance of +55% was the highest on record. Staff shortages and intended hiring growth meanwhile meant that expectations for rising staff costs were also at a series-record high of +70%. This compared with an EU average of +42% with some firms commenting that Brexit contributed to a reduced pool of available workers.
With earnings stretched by the pandemic, firms are increasingly looking to pass these costs onto their customers. A record net balance of +48% of businesses plan to raise their selling prices, giving a strong indication that consumer price inflation could accelerate over the second half of the year.
Rachel Barton added: “The cautionary note in this overwhelmingly positive outlook is the potential for rising costs and supply chain pressures. Many businesses have used the pandemic to restructure their supply chains to bring production closer to the point of demand. This, and other measures, will help them be more agile in the future and build back better, more sustainably.”