Business leaders’ profit expectations at three-year low, new research shows

Company profit expectations are at a three-year low, with confidence in their funding positions on a downward trajectory, claims the latest Grant Thornton Business Outlook Tracker.

The research includes feedback from 603 UK firms during October.

It found that just over one third (39%) of respondents expect their businesses’ profits to increase over the next six months. This is the lowest level seen since December 2021, and a significant -30 percentage point (pp) drop compared with February this year (69%).

With interest rates remaining high at five per cent, despite inflation falling, businesses’ confidence in their funding position also continued a steady decline in October. Confidence dropped -3pp compared with July, and -9pp compared with February.

While overall confidence in the economy remains stable, there has been a slight increase in businesses’ pessimism about the outlook of the UK economy across this year.

As the new government’s first Budget approaches, 13% of businesses are pessimistic about their outlook, a +4pp increase compared with February 2024.

Mick Frankish,  Practice Lead in the North West for Grant Thornton, said: “The low levels of growth expectations are in line with what we’re seeing in the market.

“Whilst the economy has shown more resilience than many expected and we managed to avoid a recession, in recent months the Government narrative has been increasingly pessimistic about the state of public finances and the spending gap, warming up businesses and the financial markets to the expected tax changes in the Budget.

“However, the downbeat tone has undoubtedly impacted business’ confidence around the economy and their own profits, which in turn hinders investment and growth.”

He added: “The symbiotic relationship between the economy and the mid-market should not be underestimated. Earlier this year our analysis of UK businesses’ labour productivity, when measured as average annual revenue per employee, showed that UK mid-market business productivity has surpassed that of larger and smaller companies for the last six years, making them the engine room of the UK economy.

“At the International Investment Summit, we heard the good news about several large corporate businesses planning significant investments into the UK, but given the mid-market’s vital contribution to the UK’s productivity, it’s important that the Government also prioritises building mid-market confidence by incentivising their ability to invest in growth.

“As the Government narrative changes post-Budget, focusing more on Invest 35 and the Industrial Strategy, which are designed to encourage investment and productivity, we expect to see business confidence rebound.”

While many businesses are already feeling unsure of their financial position, the research also finds that almost all of those surveyed expect to see some taxes/costs to businesses increase over the next 12 months.

The taxes that businesses feel would pose the biggest challenge to them, if increased, are found to be:  Environmental taxes (30%); Capital Gains Tax (30%); Corporation Tax (29%); Business Rates (29%).

All the businesses surveyed are now looking to the Government for support. The three areas that businesses would most like to see the Government focus on in the Budget are, tax incentives for businesses to invest in: Capital (30%); Skills (28%); R&D (27%). 

Dave Hillan, Tax Partner in the North West for Grant Thornton, said: “That businesses are braced for tax rises is not unexpected as the Government has not shied away from the narrative that there are tough fiscal choices to be made in order to fill what’s been described as a substantial black hole to balance the books.

“The expectation is that there will be little fiscal room for enhancing the current suite of business tax incentives.”