Rising interest rates to combat inflation is now the chief threat facing businesses, toppling concerns over energy prices and labour shortages.

Tighter monetary policy has contributed to a dip in confidence among the finance leaders of the UK’s largest firms in the second quarter, according to Deloitte’s UK Survey of chief financial officers.

With growing concerns over persistent price pressures and the potential implications of further interest rate rises, CFO perceptions of uncertainty have risen.

Almost half of respondents (45%) now rate the levels of external financial and economic uncertainty facing their businesses as high or very high, up from 39% in Q1 2023. 

The rate of inflation is expected to fall in the coming months from a peak of 11.1% last October but there are concerns about a wage-price spiral. Finance chiefs expected wage growth to fall in their own businesses, however, as the jobs market slowed.

Finance leaders report a continued easing of recruitment difficulties and labour shortages, with 13% rating recruitment difficulties faced over the last three months as ‘significant’ or ‘severe’, down from 18% in Q1 2023. They expect some further improvement over the next 12 months and ‘significant’ or ‘severe’ recruitment difficulties to ease to negligible levels in two years’ time.

Consistent with this softening, CFOs expect a slowdown in wage growth in their own businesses from 6.3% over the past 12 months to 4.7% in the next year.

Ian Stewart, chief economist at Deloitte, said: “The burst of business optimism seen in the spring has faded under the weight of inflation and rising interest rates. Corporates have responded with an increasing focus on cost reduction and cash control.

“Businesses have negotiated a series of major challenges in the last four years, including the UK’s departure from the EU, the pandemic and supply shortages. The legacy of those earlier shocks, in the form of inflation and high interest rates, is now the central challenge.”

Confidence among Scottish companies that activity will continue to grow over the coming year is higher than the European average, according to the latest Accenture/S&P Global UK business outlook.

Plans to increase investment, including in research and development (R&D) and areas such as artificial intelligence (AI), helped to offset concerns surrounding high inflation and staffing costs.

The Scottish Chambers of Commerce’s latest quarterly economic indicator suggested that business investment had flatlined in recent months, while growth was positive but “significantly subdued”.