Cocktail of headwinds freeze business confidence

A cocktail of soaring inflation, ongoing staff shortages and looming tax hikes is leaving optimism about the UK economy among business leaders unstuck, according to new research published today.

The Institute of Directors’ (IoD) economic confidence index, a closely watched survey taking the pulse of optimism among business leaders, remained unchanged at minus six in November.

Employment taxes are having a negative impact on four in 10 businesses, highlighting that firms are already being stung by a heavy tax burden even before the 1.25 percentage point national insurance hike comes into force next April. 

42 per cent of directors are noticing a negative impact on their business from the severe labour squeeze.

“Concerns around inflation, high energy prices, continuing staff shortages and the forthcoming rise in employers’ NICs, the mood music is not yet sufficiently cheerful to reverse the decline of previous months,” Kitty Ussher, chief economist at the IoD, said.

Caution about the prospects of the UK’s economic health is deterring businesses from committing to investment.

The IoD’s research illuminated the potential for inflation expectations to trend higher, a key headwind highlighted by the Bank of England that has the potential to strike down the UK’s economic recovery.

Nearly half of directors expect inflation to be running at higher than four per cent by this time next year.

The Old Lady has warned that a de-anchoring of inflation expectations could trigger a wage/price spiral in which businesses raise prices to offset future cost increases, causing workers to demand higher pay to retain their living standards.