The latest Business Confidence Monitor (BCM) shows that business sentiment in the East Midlands has improved, and is now above the region’s historical norm, and broadly in line with the UK average. But confidence is likely to be frail as companies, like consumers, continue to be impacted by high inflation, interest rates and other challenges.
The survey 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 latest quarterly findings are based on the period 27 March to 23 June 2023.
- The Business Confidence Index for the East Midlands has risen in Q2 2023 and is now above the region’s historical average.
- Domestic sales growth is healthy, outpacing the UK, as well as the region’s pre-pandemic norm. Companies expect a slowdown in the pace of increase in the next 12 months. Export growth is also strong, but is expected to moderate.
- Customer demand is the most widespread issue faced by businesses in the region but there is growing concern about the tax burden, competition in the marketplace and access to capital.
- Businesses are expanding their workforce, a trend which they expect to continue in the coming year. Salaries are growing at a faster pace in the region than elsewhere in the UK, but these are expected to slow over the next 12 months.
- Input price inflation is growing faster in the East Midlands than in all but one region, but with expectations for this to ease considerably in the year ahead. Selling prices are up by the fastest rate of any UK nation or region, but these too are forecast to moderate.
- Capital investment growth is projected to fall significantly in the next 12 months, and while businesses plan to increase Research & Development (R&D) budgets, the rate will lag the UK average.
Business confidence in the East Midlands
The Business Confidence Index for the East Midlands rose again in Q2 2023, and now stands at +6.0, ahead of the region’s historic norm (+3.8) and broadly on a par with the UK average. However, business sentiment in the East Midlands is likely to be fragile, given the challenging landscape of high inflation, rising interest rates and related difficulties.
Domestic sales and exports growth
Domestic sales performance is favourable compared to both the UK as a whole and the region’s historical average, rising by 5.5% in the year to Q2 2023. Healthy sales in Manufacturing & Engineering, an important sector in the East Midlands, are likely to be underpinning this. Companies expect a marginally slower rate of increase over the next year, to 5.3% ‒ broadly in line with expectations across the UK as a whole, and still ahead of the historical average for the region.
Export sales growth picked up in the latest quarter, and at 5.4% year-on-year, is the second highest across the UK, and faster than the historical average for the region. However, businesses are somewhat downbeat about the next 12 months, with the rate of increase easing to 4.1%, bringing it in line with the UK outlook. This is somewhat concerning as businesses in the East Midlands are among the most export-intensive across the UK.
Customer demand is the main challenge for companies in the East Midlands, with 34% citing this as a source of difficulty. Increasing numbers of companies also cite the tax burden as a concern. Indeed, 32% of businesses in Q2 report this as a challenge, an uptick from 15% in the previous quarter. It probably reflects the rise in corporation tax. Other challenges that have become more widespread in the East Midlands include competition in the marketplace, access to capital and expansion into new areas.
Labour market challenges remain a concern for companies in the region, with 31% of businesses reporting staff turnover as issues, along with the availability of non-management skills (23%). Regulatory requirements, though easing slightly as a challenge in the latest quarter, continue to be one of the most widespread issues faced by businesses.
Companies continue to expand their workforces, but at 1.5%, year-on-year, in Q2 2023, the rate is among the weakest in the UK. That said, businesses plan to see modest improvements in the coming year, with employment expected to grow by 1.7%. Although that is above the historical norm for the East Midlands, it is slower than any other UK nation or region.
Total wages are also rising at a record rate of 4.9%, outpacing all other regions and nations in the UK, underpinned by rising employment and inflation. While companies anticipate a slowdown in the rate of increase in the next 12 months, the projected rate of 4.0% is the second highest across the UK, behind only the South West (4.1%).
Input and selling prices, and profits growth
Businesses in the East Midlands are battling with rising costs. This is particularly true for the Manufacturing & Engineering sector which is an important part of the region’s economy, although the pace has eased in Q2 2023 compared with the previous quarter. Annual input price inflation stands at 6.8%, the second highest rate of any UK nation or region, and almost three times the historical average for the region. But like elsewhere, businesses in the East Midlands expect the rate to fall sharply over the coming year, to 3.8%.
With the backdrop of rising costs and salaries, companies continue to increase their selling prices. Indeed, at a record rate of 4.9% year-on-year in Q2 2023, the increase is the third-fastest of any nation or region in the UK. Despite rising costs, profits growth at 3.7% has been faster than the UK average (3.0%), and companies expect improvements in the rate (5.3%) in the next 12 months.
Improved business sentiment is providing support to investment in the East Midlands. Capital investment is growing by a moderately healthy 2.7% in Q2 2023, which is notably above the historical average for the region (1.9%) and somewhat higher than the UK (2.5%). However, businesses expect the rate of increase to fall sharply over the next 12 months, to 0.8%. Research & Development (R&D) budgets are also up, but only by 1.2% compared to a year ago, lagging the UK average. Companies plan to increase budgets by a similar rate in the year ahead and will continue to underperform relative to the UK average.