Director Weekly  The latest IoD data shows that directors’ optimism about the economic outlook has risen again but so have concerns over the global economy

Business leaders’ confidence in their own organisations also rose to +23, from +8 in April and -2 in March. The majority of the underlying indicators rose again too, although the improvement in investment intentions only brought spending plans to flat on the previous year, while headcount expectations remained stagnant and a touch negative (-3).

It makes for an eerily calm picture of the UK economy – eerie, because those numbers stand in stark contrast to the substantial risks that continue to loom as the disruption caused by the Iran war works its way through the global economy. Unsurprisingly, concerns over the global economy jumped to the top of directors’ global risk list this quarter, followed by ongoing concern over geopolitical tensions.

The latest warnings over building risks to the outlook came this week from the OECD. Its June Economic Outlook shows that global growth could slow to just 1.8% in 2027 under a prolonged disruption scenario – a rate comparable to crises such as the Great Financial Crash or the Covid pandemic. This scenario would see energy and fertiliser prices spiking higher for longer, with tighter financial conditions, weaker public finances and potential impacts AI investment through energy costs and component shortages.

Yet the national conversation reflects little of this concern. Understandably, ministers have struck a reassuring tone in public, urging people not to change their plans for fear of triggering a market slowdown. Yet even as they urge holidaymakers to keep booking their summer breaks, ministers have approved the purchase of oil from sanctioned Russia: hardly a sign that all is well with the UK’s energy supply.

Recent weeks have also seen some politicians float economic ideas that bear little relation to the reality we face. Wealth taxes, rent controls and price controls fail to consider what is really driving up prices – namely the rising taxpayer cost of supporting an inefficient and risk averse state. Generating uncertainty over the taxation of returns to investment is hardly likely to drive the investment needed to improve stagnant living standards.

We also need a more realistic debate about how government might prioritise support for business if (or when) a true crisis unfolds. In some recent conversations with business leaders, I’ve heard it argued that if crisis strikes, the government has money to spare to step in to support companies.

Yet this is based on a misreading of the public finance impacts of rising energy prices. There is, to borrow a phrase from an earlier era, no more money. Previous public spending, including during Covid, has burdened the UK with vast debts; simply borrowing more will result in higher borrowing costs. The UK already has the highest borrowing costs of the G7 and they have risen the most since the Iran war broke out – largely because our inflation outlook is expected to necessitate more rate rises than elsewhere. This has an important – and negative impact on the public finances. Alas no pot of money is being amassed through the taxation of energy companies: it is merely ameliorating a worsening position. So we’re heading towards a tough Budget in the autumn; any interventions to support business and household will be tightly targeted.

What, then, can business do? The first priority should be to strengthen supply chains: building supplier relationships, understanding vulnerabilities, identifying back-up options where needed, stockpiling where appropriate. For those less directly exposed to the direct impacts from the conflict, it’s a matter of enhancing resilience now to cushion weaker growth and higher inflation later.

The Iran war is building up to send shock waves through the global economy. An early peace deal and reopening of the Strait of Hormuz would take some of the power out of those waves when they break on UK shores, but a negative hit is baked in. Current data may show stability right now – but the situation could look very different in six months’ time.

Priorities for government support

As we continue our discussions with government, we would welcome directors’ views on where public support for business should be prioritised, given the current fiscal constraints. Please share your suggestions by emailing [email protected].