The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits in the year ahead.
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 15 April to 22 June 2024.
- Sentiment in the East Midlands improved only slightly in Q2 2024, remaining one of the least confident regions with the struggling Manufacturing & Engineering sector likely weighing on sentiment.
- Domestic sales have been decelerating since Q4 2022, but businesses expect them to pick up. Exports performed significantly better, with one of the highest growth rates in the country.
- Input price inflation and labour costs growth both remain well above their historical averages but have been following a downward trajectory that is expected to continue. Meanwhile, employment expanded at double the historic rate, but this is also projected to slow.
- Businesses increased their selling prices at a marginally faster rate than the UK average, but this was not enough to contain the continued decline in profits growth. An uplift is anticipated over the next year to nearly double the historical average.
- Capital investment and R&D budget growth was slower than in other regions, with businesses planning further easing in the next 12 months.
- Regulatory requirements and customer demand remain the most prevalent rising challenges faced by businesses in the region.
Business confidence in the East Midlands
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The Business Confidence Index for the East Midlands continued to rise in Q2 2024, reaching +11.0 and up from +6.7 in the previous quarter. However, while business confidence is ahead of the historical average for the region (+4.0) it remains one of the weakest in the UK, with Wales the only region with a lower score. Indeed, weak domestic sales growth and the performance of the locally important Manufacturing & Engineering sector is likely weighing on sentiment in the region which is struggling to gain momentum compared to the UK average, which now stands at +16.7.
Domestic sales and exports growth
Domestic sales growth continued to decelerate in the East Midlands, now for the sixth consecutive quarter. In Q2 2024, sales grew by 3.2%, which, despite being below the national average of 3.3%, remains above the region’s historical average (2.9%). Businesses expect domestic sales to rise in the next 12 months by 4.8%. The relatively weaker performance and outlook is partly driven by the large presence of manufacturing businesses in the East Midlands, which reported the lowest growth in domestic sales of all industries.
Export growth has been much stronger, expanding by 3.6% in Q2 2024. This was higher than every region and nation, with the exception of the East of England. However, businesses are less optimistic about the next 12 months, as they predict export growth to ease to 2.9%, below the national average of 4.5%.
Business challenges
Regulatory requirements continue to be the most widespread challenge for businesses in the East Midlands in Q2 2024, but the share of businesses citing them as a growing concern (49%) increased significantly compared to the previous quarter (37%). This is likely due to the rise in concern seen across typically less-regulated industries such as Retail & Wholesale, IT & Communications and Property. Regulatory concern was closely followed by customer demand (46%), reflecting the disappointing sales performance that businesses reported.
Competition in the marketplace is also a prominent issue, with 28% of companies in the region reporting it as a growing concern. The proportion of businesses reporting late payments as a rising challenge has been rising in some regions and in the East Midlands it reached 26% in Q2 2024, ahead of the historical and national averages. Late payments have been rising in Construction, Business Services and Manufacturing & Engineering, which together account for over a third of the East Midlands’ economy and may explain the rise in the region. Concerns about the tax burden (25%) remain very high compared to the historical average of 16% but are consistent with the national picture.
Labour market
Employment growth in the East Midlands was above the national average in Q2 2024, reaching 2.0% compared to 1.8% nationally. Yet, this represented a slowdown compared to the previous quarter and businesses anticipate this to continue over the next year, with an expected growth rate of 1.5%, below most other regions and nations.
Salary growth continued to decline in Q2 2024, to align with the national average at 3.7%. Businesses expect this downward trajectory to continue next year, with predicted growth of 2.8%, one of the lowest of the UK. Meanwhile, businesses in the region were less likely to report concerns about labour market issues such as staff turnover or availability of non-management skills than businesses nationally, but concern about the availability of management skills is elevated compared to most other regions.
Input and selling prices, and profits growth
Input prices continue to grow at a fast pace, with a rate of 4.4% recorded in Q2 2024, in line with the national average. Growth has been consistently decelerating following a peak in Q1 2023 and businesses expect this to continue over the next 12 months with the rate projected to fall to 2.3%, below the historical norm (2.7%).
Selling prices followed a similar pattern. Growth was still high in Q2 2024, at 3.4%, above the national average of 3.2% and more than double the region’s historical average (1.5%). But growth was on the decline and is expected to continue in that direction in the next year, with businesses expecting selling prices to grow by 2.2%.
Despite falling cost inflation and increased selling prices, weak sales are impacting profits growth in the region, which declined to 1.8% in Q2 2024 and below their historical average (2.6%). This rate of growth is also lower than the national average (3.1%) and weaker than any other UK region apart from Scotland. With the predicted continued slowing of input prices and salary growth, together with rising sales, profits growth is expected to bounce back over the next year to 5.0%. However, this is less optimistic than the UK average of 5.5%.
Investment
The uptick in capital investment growth observed in Q1 2024 was short-lived, and growth decelerated to 1.0% in Q2 2024. This was the slowest growth in capital investment across all UK regions and nations, and below the East Midlands’ historical average of 1.9%. Despite expectations that trading conditions will improve, businesses are not planning to overly expand their capital investment. Indeed, they plan to curb growth to just 0.7% next year, in contrast to the expected 2.1% across the country.
R&D budgets grew by 1.4% this quarter, a drop from the previous quarter (3.3%), and a lower performance than the national average of 1.9%. Businesses anticipate R&D growth to slow further to 1.1% in the coming 12 months.
