According to the Institute of Directors’ latest survey of business leaders, as many companies are now planning to cut their investments and increase them. This is the weakest reading since October 2020 as nervous companies rein in spending. UK business investment intentions have fallen steadily since the start of the year as input costs have soared and the economy has slowed, undermining efforts to boost productivity. Business leaders are also less optimistic about their own prospects, with more than half saying economic conditions in the UK are having a negative impact on their organisation, along with rising energy costs and skills shortages. The IoD’s economic confidence index, which measures business leaders’ view of the UK’s economic outlook, remained very low at -54 in July, only slightly higher than June’s -60. Sixty-nine per cent of bosses were either very or quite pessimistic about the UK economy, while just 15% were optimistic about the outlook. Inflation, now at a 40-year high, was the most common reason for pessimism, cited by a third of businesses. Almost 20% of pessimistic bosses said difficulties in the UK’s trade relationship with the EU were their main concern, as the introduction of customs controls and border delays have hampered exports. “Perceived risks to the macro economy continued to drive the behavior of business leaders in July, with concerns about inflation, our relationship with the EU and political instability increasingly dampening investment intentions,” warned Kitty Ussher , chief economist at the Institute. of Directors. Official figures show business investment has stalled since the 2016 EU referendum. It then fell when the Covid-19 pandemic began and was still 9.1% below pre-pandemic levels earlier this year. Ussher also worries about the recent weakening of business leaders’ confidence in their own prospects, saying, “That’s something to watch in the coming months.” The survey took place from July 13 to 28, as the race for the leadership of the Conservative party to replace Boris Johnson began. The IoD says the “new political leadership team being set up in the autumn” must include stronger incentives for businesses to invest, as part of a clear economic strategy to improve business confidence. Liz Truss, currently the front-runner to become the next prime minister, has pledged to introduce low-tax, light-regulation investment zones across the UK if she comes to power. Rishi Sunak, the former chancellor who introduced an “excess” tax break for business investment, is promising to reduce the number of shops set up by helping local authorities quickly seize and re-use empty commercial buildings. Companies are also struggling to recruit and retain staff as households are squeezed by the cost of living crisis. A fifth of medium-sized businesses said recruitment and retention problems are the biggest threat they face, according to a survey by accountancy and business consultancy BDO. Almost half of businesses say they offer new in-kind benefits to staff, such as childcare support, free lunches at work or shopping vouchers. More than four in 10 give lump sum bonuses to colleagues as prices soar above wages. BDO also warns that some businesses have been forced to halt recruitment and growth plans, with a 21% reduction in headcount and a fifth freezing all new investment. A quarter are taking on more debt, which could become more expensive to service as borrowing costs rise. “Inflation and rising costs have put deep pressure on business leaders,” said Kaley Crossthwaite, partner at BDO LLP. “It is particularly worrying to see businesses taking out additional loans and credit to manage costs – despite rising interest rates.” The Bank of England is expected to raise interest rates again on Thursday as it tries to contain inflation. Some City economists predict the BoE could raise the Bank Rate by 50 basis points to 1.75%, having already raised rates by 25 basis points in the past five meetings. “The near-term outlook for inflation has worsened,” said Investec chief economist Philip Shaw, who predicts the Bank will agree to its first half-point hike since independence 25 years ago. “Stronger gas prices now mean we expect CPI inflation to peak above 12% in October before easing again. Our expectation is that the committee may fear a wider transmission to other prices and a more aggressive wage response,” Shaw added.