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Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse, Q4 2021.

The latest Business Confidence Monitor (BCM) shows that business confidence has weakened, though it is still very high, as businesses are facing growing challenges with skills availability, staff turnover, input costs, and transport problems. Sales expectations for businesses are still strong, but not at the levels of the previous quarter.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period between 19 July and 15 October 2021.

Key points

  1. Business confidence for the next 12 months has weakened compared with the last quarter, but it is still very high. Similarly, companies expect sales (especially to the domestic market) to grow strongly over the same period, but less so than they thought a quarter ago.
  2. There are large sectoral variations. IT & Communications, Transport & Storage and Business Services companies are the most confident about business conditions and Manufacturers and Retailers & Wholesalers are the least confident.
  3. Companies also face growing difficulties with skills availability, staff turnover, input costs and transport problems. Manufacturers and Retailers, Transport companies, and to a lesser extent Construction, tend to be facing the most widespread challenges.
  4. Small and Medium Sized Enterprises are a little less confident than other companies, and have experienced weaker sales growth, but they expect the strongest increases in domestic sales. They are also more troubled than others by rising input prices.
  5. Regional variations are mostly small. The recovery is occurring everywhere, and the challenges are similarly widely spread.

GDP

Supply challenges dampening the speed of recovery

  • GDP growth faltered in July, largely due to the ‘pingdemic’, but recovered in August and September.
  • Rising fuel and energy prices have pushed up headline CPI inflation, exacerbated by price falls last year.
  • Government guidance and restrictions have been gradually relaxed or removed, as well as the pandemic relief schemes. With a gradual reopening of the economy, unemployment has fallen, employment has risen and job vacancies have reached a new record high.

During the latest survey period the UK economy has continued to edge its way out of the deep recession caused by the global COVID-19 pandemic. Considerable momentum has been provided by the staged removal or relaxation of most of the guidance and restrictions that had been placed on economic and social activity, most notably those relating to leisure, entertainment and sporting activities. The main restrictions that still apply relate to travel to or from various countries outside of the UK, which continue to have a dampening effect on those parts of the UK economy that are reliant on international tourism.

However, progress was temporarily interrupted in July by a rise in infection rates as a result of the Delta variant − the so-called ‘pingdemic’. With consumer demand increasing both at home and abroad and with employment and job vacancies rising as a result, many businesses have been experiencing difficulties in the recruitment of staff; in obtaining raw materials and components; and in securing the transport resources that they need to make deliveries. Meanwhile inflation has increased, partly driven by higher energy prices, and not helped by price falls in the summer of 2020 which have made the year-on-year rise greater than usual.

These ‘supply side’ problems, which are by no means unique to the UK, have also had the effect of dampening the speed of economic recovery, as has the planned gradual withdrawal of many of the support mechanisms which the government put in place to help households and businesses during the most difficult phase of the pandemic. Nevertheless, 2021 GDP will clearly be substantially up on the 2020 level.

Confidence overall

Confidence and sales expectations have weakened but remain high

  • Confidence has fallen but is still at a very high level, with the IT & Communications, Transport & Storage, and Business Services sectors particularly optimistic, while Manufacturers and Retailers & Wholesalers are the least confident.
  • Similarly, domestic sales are still expected to grow strongly, but less so than in the last quarter.
  • The same pattern is true for export sales, although the rate of increase is lower than for domestic sales.

2021 has seen business confidence, measured by the extent to which companies are more or less confident for the next 12 months compared to a year earlier, rising to unprecedented levels. The confidence index for the current quarter is only slightly lower in Q4 than in the third quarter, and at 35.8 it is only slightly lower than the pre-pandemic peak of 37.3 in Q2 2014.

The small decline in the quarter probably reflects the increasing problems that businesses have been experiencing, both domestically and globally, with rising costs and supply chain disruptions. In addition, a rise in infection rates has demonstrated that the pandemic is not over and that a return to tight restrictions cannot be ruled out. Indeed, companies’ sales expectations display a similar pattern to overall confidence: historically very high, but slightly less so this quarter than in the previous one. Expectations for domestic sales are slightly stronger than for exports, with forecast rises of 6.3% and 4.0%, respectively, following 3.2% and 1.4% over the last 12 months. Export growth is, nevertheless, lower than it was before the pandemic, with Brexit a likely contributory factor.

While in every sector confidence is historically very high, there are some large sectoral variations. It is strongest in the IT & Communications, Transport & Storage, and Business Services sectors, and weakest in Manufacturing and Retail & Wholesale. This reflects differences in the extent to which these sectors are impacted by current supply chain and recruitment disruptions. Admittedly, parts of the Transport sector are seeing very high recruitment difficulties; but in terms of confidence, that is clearly outweighed by the surge in demand that the sector is experiencing, compared with a year ago.

Business challenges

The recovery from recession is creating new business challenges

  • With the economy reopening, fewer companies are experiencing growing difficulties with customer demand, while late payments are becoming less problematic.
  • Instead, supply challenges are increasing, for skills (especially non-management) availability, staff turnover and transport. Some sectors such as Manufacturing are particularly affected.
  • Regulatory worries are also high and rising, and tax concerns, while still at a low level, are starting to increase. The former may be Brexit-related, and the latter may reflect the withdrawal of some business support schemes, and growing expectations of future tax rises.

As the economy moves out of recession, problems relating to customer demand are declining. Instead, increasing numbers of companies are experiencing rising challenges with the availability of skills, especially non-management skills, and staff turnover. Lack of suitable skills, and competition from other employers, are the two most common explanations for hard-to-fill vacancies.

Transport problems are also growing. Late payments by customers and the ability to expand into new areas are, in contrast, diminishing in significance, thanks to the strengthening in customer demand.

The sectors facing the largest increases in problems with non-management skills are Manufacturing, Transport and Construction, with the second of those also particularly troubled by management skills availability. Transport is also most challenged by staff turnover, with the IT & Communications sector having a similarly widespread problem, and Business Services and Manufacturing not far behind. For transport difficulties, it is Manufacturers and Retailers who face the most extensive increases in problems, alongside the Transport sector itself.

Nevertheless, the most commonly experienced challenge to businesses is regulatory requirements, with pandemic-related restrictions and Brexit trading complexities the most likely explanations for that. There is also a rising trend (although from a relatively low level) in companies reporting the tax burden as an issue, possibly reflecting the removal of some government support schemes for businesses, and also perhaps anxieties over the future trend in tax rates, not least corporation tax and the proposed National Insurance levy to fund social care

Prices

Costs and prices rising, but productivity gains also being achieved

 

  • Input costs have risen and are expected to continue doing so. This reflects global supply chain problems, rising energy prices and also the impact of transport shortages.
  • However, companies have also been able to raise their selling prices and expect to continue doing so, at higher rates than before the pandemic.
  • Improving productivity should help to keep selling price inflation under control, with many more firms having experienced rising productivity than falling, despite the business challenges created by the pandemic.

Input prices continue to rise, reflecting growing demand both at home and abroad, disruptions to supply chains and transport shortages, and some marked increases in commodity prices and energy prices (including oil and gas) on global markets. Companies report a 2.6% increase in their input prices over the last 12 months, and they expect to see a similar rise over the next 12 months.

The challenge for companies will be the extent to which they are able to pass these cost increases on to customers. Most have been able to do so, at least in part, with selling prices rising by 1.3% over the last year. Over the next year, these increases are expected to be slightly stronger, at 1.7%, which will be higher than before the pandemic.

A factor that should help to keep selling prices from running further ahead is improving productivity, with more than twice as many companies having experienced rising productivity over the past 12 months than a decline: 42% versus 17%. It is likely that during the pandemic a large proportion of companies have worked to improve their processes, not least through better use of digital technology.

Employment

Pay and employment are up, and are expected to continue rising

  • Increasing problems with skills shortages and staff turnover and a rising jobs market are reflected in stronger salary growth. Indeed, near-record rises are forecast for the year ahead.
  • Much will depend on whether current shortages of skills prove to be a temporary issue, or a longer-term problem.
  • Certainly, companies plan to increase employment sharply over the next year, as customer demand continues to recover.

As well as rising input prices, labour costs are increasing for businesses. Salary growth in the year to Q4 2021 stands at 1.5%, a rate that is slightly below the UK historical average but markedly stronger than during the peak of the pandemic.

And against a backdrop of concerns over the availability of skills and staff turnover, salaries are expected to rise at the faster rate of 2.5% over the next year. If that happens it will be the sharpest increase in over a decade. Much will depend on whether current skills shortages prove to be transitory, or whether they remain as a longer-term problem for businesses.

Recruitment difficulties partly reflect employment rising by 1.3% over the last year, similar to pre-pandemic rates. This is the first period of positive year-on-year growth since the pandemic began. There is little evidence of the phasing out of the Coronavirus Job Retention Scheme causing a surge in job losses. On the contrary, expectations of sharp rises in customer demand mean that companies plan a strong 2.9% increase in payrolls over the next 12 months.

Investment

Investment is expected to recover over the year ahead

  • Growth in capital investment and Research & Development budgets has picked up, and faster rises, particularly for the former, are expected in the year ahead.
  • Stronger company finances and a decline in spare capacity are likely factors driving this capital spending, although sectoral variations are important too.
  • Capital spending plans are strongest in the Manufacturing, Energy and Retail sectors.

Growth in capital investment and Research & Development (R&D) budgets has improved in the year to Q4 2021, although rates are still subdued when compared to before the pandemic. In the year ahead, however, investment is expected to rise faster. Businesses plan to increase capital spending by 2.5%, while R&D budgets are set to rise by 1.6%.

These plans have been made more achievable by an improved financial situation for businesses. Access to capital is now a less pressing challenge for businesses and profits have rebounded and are expected to rise further − although not quite as fast as companies anticipated a quarter ago, reflecting the downward adjustment to their sales expectations. There has also been a rapid decline in the proportion of companies operating with spare capacity, to just 40% − the lowest rate since the survey began in 2004.

Across sectors, businesses in Manufacturing, Energy, Water & Mining, and Retail & Wholesale have the strongest capital spending plans. Manufacturers face strong global competition, an issue that has been amplified by the new post-Brexit trading environment. Strong investment rates in Energy, Water & Mining partly reflect the need to reduce emissions and transition to more renewable sources of energy. For Retailers, spending is probably being driven by the sector’s move towards digital trading.

Confidence by sector

There are significant variations in sectors’ experiences

  • All sectors anticipate strong domestic sales and exports growth in the year ahead, led by IT & Communications, Transport & Storage and Business Services.
  • The same three sectors also stand at the top of the Business Confidence Index in Q4 2021.
  • Manufacturing and Retail are the least confident sectors. They, together with Transport and to a lesser extent the Construction sector, are facing the most problems with skills availability, transport and input costs.

Businesses in IT & Communications, Transport & Storage and Business Services are, on balance, the most confident sectors in Q4 2021. This is likely to be underpinned by the three sectors having the strongest growth outlooks for both domestic sales and exports in the year ahead. Employment growth is also set to be fastest in the IT & Communications and Business Services sectors over the next 12 months.

At the lower end of the business confidence spectrum are Retail & Wholesale and Manufacturing companies. Both sectors, along with Construction, have been hampered by significant supply-side issues, with input prices rising at faster rates than elsewhere over the last 12 months. These cost pressures also look likely to persist through the next year.

Transport problems have been more acutely felt in Manufacturing and Retail, as well as in Transport & Storage, than in other parts of the economy.

Skills shortages are also impacting some sectors more than others. The availability of non-management skills as a growing challenge is most widespread in Manufacturing and Construction, with labour supply bottlenecks emerging as companies try to quickly recruit new staff in response to a release of pent-up demand for manufactured goods and building work. Added to this, limited access to overseas workers due to the pandemic and Brexit-related restrictions are likely to have weighed heavily on Construction companies, given their historical reliance on foreign recruitment.

Confidence by region and nation

Strong confidence is shared across all UK nations and regions

  
  • Business confidence is in firmly positive territory across all UK nations and regions and companies everywhere expect strong growth in both domestic and export sales.
  • Businesses in the East Midlands have the strongest outlook for domestic sales, although, along with Yorkshire & Humber, they also have the highest proportion of companies reporting non-management skills as a growing issue.
  • Welsh companies report most strength with regards to exports.

The Business Confidence Index has remained strong across all UK nations and regions in Q4 2021, with only minor variations in overall sentiment, and expectations for domestic and export sales are similarly positive, everywhere. Companies in the East Midlands have seen the sharpest domestic sales increases over the last year and they also have the strongest domestic growth expectations. On the export side, it is Welsh companies that have seen the fastest rises and are also the most bullish regarding exports for the year ahead.

However, the East Midlands and Yorkshire & Humber have the highest proportions of companies citing the availability of non-management skills as a growing challenge. This issue has been particularly prominent within Manufacturing, a sector that has a large presence in both regions. The same two regions have also faced the biggest rises in input prices over the last year.

London businesses are unsurprisingly the least troubled by transport problems, reflecting the capital’s relatively small Manufacturing base.

Confidence by business size

Small businesses expect very strong growth in domestic sales

  • Confidence and improving sales performance are common across companies of different size and ownerships structures, and for those that do and do not export. The economic recovery is very widespread.
  • Among the differences that do exist, Small and Medium Sized Enterprises (SMEs) have seen slower sales growth than others but are particularly bullish for domestic sales in the coming 12 months. They are also more challenged than other businesses by rises in input prices.
  • Transport problems are more common among exporting firms than those that do not export.

The overall pattern of strong confidence, albeit down compared with last quarter, is apparent for both listed and unlisted companies; for domestically and non-UK listed; for both larger and smaller (fewer than 250 employees) privately owned companies; and for those companies that do and do not export. Combined with similar evidence across sectors and regions, this demonstrates that the recovery in the UK economy is extremely widespread.

There are, of course, some differences. UK listed companies are slightly more confident than privately owned and non-UK listed businesses. And over the past 12 months, larger private and UK listed companies have achieved particularly strong domestic sales growth, while SMEs have seen a more muted recovery in sales.

In the year ahead, however, SMEs have the most bullish outlook for domestic sales. And only UK listed companies anticipate stronger export growth than SMEs. On the downside, SMEs expect the fastest rises in input prices over the next 12 months, perhaps reflecting their weaker bargaining power when compared to larger businesses, which are better able to resist price increases from suppliers.

In terms of challenges, transport problems are, unsurprisingly, a much more widespread issue for exporters than non-exporters. In contrast, large privately owned and UK listed companies are the most troubled by the availability of non-management skills.

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Using BCM data

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