At a glance
- Latest IoD data shows that business confidence is up, but headwinds continue.
- Signs of recovering demand post-Budget and resilience in some consumer spending.
- However risks include economic slowdown impacting business, and wage stagnation.
- Strong scenario planning is vital for businesses to navigate the challenges.
The latest IoD Economic Confidence Index finds that business leader confidence in their own organisations rose slightly to +15 in May from +13 in April. The data revealed optimism about growth opportunities in energy innovation, defence, construction and through a closer relationship with the EU.
Despite the index climbing to its highest point since August 2024, expectations for costs remain high and headcount plans have dipped into the negative.
How can accountants help clients navigate a seemingly improving economy that’s still fraught with risk?
What could rising confidence mean?
The IoD’s headline confidence measure has risen for three months in a row, and coupled with the trade deals secured by the Prime Minister, business leaders are feeling more optimistic. Anna Leach, IoD chief economist, says there are signs that demand is thawing post-Budget amid some resilience in areas of consumer spending.
Firms can expect that as confidence improves clients will be quicker to make decisions, particularly in areas supported by a pipeline of government-backed work.
IoD members have identified a variety of growth opportunities for the UK in coming years. “Tech and innovation, energy and net zero, housing and infrastructure, trade and international relations and skills are all areas in which growth opportunities abound,” Leach says.
She cautions the index has only recovered half of its losses since summer 2024. “Confidence continues to be buffeted by cost pressures – particularly employment costs, and political uncertainty – both domestic and international, alongside regulatory complexity – including in trading relationships,” she says.
Businesses still face significant challenges
The index found the global economic slowdown, cybersecurity and geopolitical tensions were the top three global risks.
Leach says they overlapped, with a “global economic slowdown and geopolitical tensions will directly impact exporters through their markets, and importers through availability, underlying price and exchange rate effects, but will indirectly impact non-trading companies too”.
“Because the UK is an open economy – exports and imports together account for around two thirds of GDP – even non-exporters would be affected by spillover effects from impacted companies and clients elsewhere,” she says.
The contrast between rising wage expectations and flatlining headcounts means there are still some tough times ahead for small businesses.
“Confidence continues to be buffeted by cost pressures – particularly employment costs, and political uncertainty – both domestic and international, alongside regulatory complexity – including in trading relationships.”
Anna Leach, Chief economist, Institute of Directors
Employment costs have also ramped up following the rise in the employer National Insurance contributions rate and lowering of the threshold, and the 6.7% rise in the minimum wage. Job vacancies have now fallen below pre-pandemic level and payroll numbers are down by more than 150,000.
On various measures collected and monitored by the Bank of England, wage expectations are coming down, with private sector wage growth expected to be around 3.5% by early 2026.
Leach says: “Some members of the Bank of England rate setting committee – particularly the Chief Economist Huw Pill – are concerned that consumers have become more sensitive to and intolerant of inflation, meaning that even a relatively short-term increase in inflation may push through to wage demands.”
How can accountants advise clients amid conflicting signals?
Rising costs and weaker demand will continue to squeeze profit margins, limiting the ability to pass increased expenses on to customers.
To build resilience to shocks, there is a need for effective scenario planning. Accountants should also advise clients to consider what actions would best buttress the company against the impacts from some consideration of negative scenarios.
The first step, says Todd Davison, Managing Director of Purbeck Insurance Services, is for accountants and clients to work together to develop a client’s risk register. “This is essentially a document that lists all identified risks, their potential impact, likelihood of occurrence, and planned mitigation measures,” he says.
This is an opportunity for a firm and accountant to take a step back from the day to day running of the business and determine what the key risks to the business are, whether financial, regulatory, customer reliance, key person dependency, reputational, competitor or succession.
Once the key risks have been determined and graded based on their likelihood of occurrence and severity of impact, mitigation measures can be developed and implemented.
Davison suggests running financial plans across various scenarios, such as losing a key customer, rising supplier costs, competitive pressures or macroeconomic shifts. This exercise helps identify areas of vulnerability in need of resilience.
Cloud accounting software that provides a real-time view of banking and financial data can streamline operations. “Knowledge is power and having this overview on the financial position of the business can mean decision makers are better informed about the now,” he says.
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