UK businesses have become increasingly cautious about investment as confidence weakened and inflation concerns returned, according to the latest Quarterly Economic Survey from the British Chambers of Commerce.

The survey found that only 17 per cent of businesses planned to increase investment in plant, machinery or equipment over the next three months, down from 21 per cent in the first quarter and the lowest level since the Covid-19 pandemic. More than a quarter of firms said they intended to reduce investment, while 57 per cent expected spending to remain unchanged.

Business confidence also deteriorated. Just 44 per cent of firms expected turnover to improve over the next 12 months, compared with 49 per cent in the previous quarter, while almost a quarter anticipated lower revenues.

Trading conditions softened during the period. Fewer than one in three businesses reported higher domestic sales over the previous three months, while 28 per cent said sales had fallen. Hospitality and retail remained among the weakest-performing sectors, both for sales and future expectations.

Inflation returned as the dominant concern for businesses, cited by 66 per cent of respondents, up from 50 per cent in the first quarter. Labour costs remained the biggest source of pricing pressure, affecting 70 per cent of firms, while concern over fuel costs almost doubled to 52 per cent following disruption to global oil markets during the conflict involving Iran.

Despite expectations that interest rates will remain unchanged in the near term, concern about borrowing costs also increased, while more than half of businesses continued to identify taxation as a significant challenge.

David Bharier, deputy director of economics and insight at the British Chambers of Commerce, said the findings suggested businesses were becoming increasingly risk-averse after several years of rising costs, policy changes and geopolitical uncertainty.

He said many firms viewed government policy as adding to business risk rather than encouraging growth, arguing that future measures should be judged by whether they increase investment, hiring, exports or expansion.

The survey, conducted between 11 May and 8 June, gathered responses from more than 4,700 UK businesses, of which 92 per cent were small and medium-sized enterprises.