Director Weekly  The UK economy beat expectations in February but directors’ confidence crashed in March. As the Iran crisis drags on, the government needs to look again at its support for business

The latest ONS data revealed unexpectedly strong performance right before the war, with GDP up 0.5% in February. That broadly tallies with the uptick in optimism we tracked in the IoD Directors’ Economic Confidence Index for January. Yet the most recent data shows a very different picture: directors’ optimism for the UK economy fell to a new all-time low of -76 in March, down from -63 in February.

Directors’ confidence in their own organisations also fell marginally, to -2 from +1; revenue expectations dropped too. There is clearly a substantial difference between directors’ perceptions of their own company’s resilience and their perceptions of the wider economy – and the government’s ability to navigate the crisis.

Ministers have projected calmness as they’ve reassured consumers that contingencies are in place and there’s no need to change behaviour. Rightly so; nobody benefits from market panics. Yet businesses want to hear that the government is there for them too – that it understands their problems, and that it will act to mitigate inflationary pressures through the supply chain rather than simply intervening at the end price point.

Because the truth is that as bad as things are now, they could yet get much worse. For now, markets are betting on the conflict being short and energy supply improving quickly. If that proves wrong, we could see oil quickly reach $150-160 a barrel.

Shortages could take us into unchartered territory – yet of course, we know that many businesses are already extremely worried. The recent ONS Business Insights and Conditions Survey highlights the sectors most concerned about disruption, including manufacturers, wholesale, retail, accommodation, food, and construction. They have in common a high level of exposure to energy price rises and a reliance on global supply chains – and few in those sectors have the margins to absorb major hits.

Yet the wider reality is that the whole economy – not just particular sectors – are under increasing pressure. The latest forecasts from both the OECD and IMF warn that among developed economies, the UK stands to be the hardest hit. Among the reasons: we’re highly dependent on fossil fuels; pre-crisis inflation was higher than elsewhere; and government borrowing is already at high levels. Meanwhile, the IMF notes that the UK is raising taxes at the fastest pace in the G7. The Treasury has few options to boost growth by increasing public spending, while rising borrowing costs are giving the Chancellor a significant headache.

Yet inaction is not an option. In the IoD’s discussions with government we’re stressing the need to support business resilience – with measures to sustainably address uncompetitive energy costs a primary focus. We have welcomed the extension of the British Industrial Competitiveness Scheme to 10,000 companies, yet energy costs are an issue across the business economy, not only in manufacturing. Further action to address the price of energy is needed well before 2027 to underpin business confidence and manage cost and inflationary pressures.

The crisis underlines the need for meaningful reform of the UK’s energy markets, breaking the link between electricity and gas prices. We’ve called for a pragmatic approach to domestic production, which means increasing North Sea production. No, North Sea drilling will not directly cut prices for energy users – they’re set globally – but it will yield a welcome tax return while we continue to reduce our reliance on fossil fuels. That would be a helpful fillip to the Exchequer given the ongoing pressure on the public finances.

With peace talks in the Middle East remaining fragile, there is little confidence about when energy and other supply chains might return to normal. Even in the best-case scenarios, we will be living with the effects of this war for a long time to come. The government needs to be bolder than it has been to date in addressing the pressures facing UK businesses. That includes removing regulatory barriers to growth and urgently addressing concerns over the Employment Rights Act.

Directors’ economic confidence

Find all the latest insights from the IoD Directors’ Economic Confidence Index here.