The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.
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 January to 22 March 2024.
- Sentiment in the East Midlands was the weakest in the UK in Q1 2024, despite a slight rise from the previous quarter.
- Domestic sales growth was unchanged from Q4 2023, slightly outpacing the national growth rate. The pace of expansion is expected to improve somewhat in the next 12 months. Export sales will follow a similar trend, but growth is expected to lag the national average over the next year.
- Employment growth in the East Midlands slowed slightly but still outpaced other parts of the UK. Companies anticipate slower growth in the year ahead.
- Input price inflation eased but remains high and labour costs are still rising sharply. Only modest slowdowns are expected for each in the year ahead.
- Selling price inflation was one of the fastest rates in the UK and this is expected to be true for the next 12 months as well.
- Regulatory requirements and customer demand are the most widespread growing challenges for businesses in the region.
- Growth in capital investment and R&D budget growth picked up compared to the previous quarter, but slowdowns are expected in the coming year.
Business confidence in the East Midlands
The Business Confidence Index for the East Midlands experienced a marginal rise to +6.7 in Q1 2024, up from +4.9 in the previous quarter and remaining ahead of the historical average for the region of +3.9. However, despite the modest rise, sentiment in the region was the weakest in the UK and below the national average (+14.4). Confidence in the East Midlands has changed little over the last five quarters, suggesting that while trading conditions are improving, businesses in the region remain somewhat cautious about prospects for the year ahead.
Domestic sales and exports growth
However, sales figures for the region are encouraging. Domestic sales growth in the East Midlands matched the previous quarter at 3.7%, outpacing the national average (3.3%). The strong sales performance of Transport & Storage businesses, which is an important sector in the region, likely boosted overall domestic sales, offsetting some of the weakness from the prominent Manufacturing & Engineering sector. Businesses in the region anticipate growth to improve further to reach 5.7% over the next 12 months, almost doubling the historical average of 2.9%.
Export sales growth also outperformed the UK average (2.8%) over the past 12 months, with a 3.4% increase to Q1 2024. Companies in the region expect export growth to improve to 4.5%, significantly above the historical average of 2.6%. On this measure, businesses in the East Midlands are only marginally less optimistic compared to the national average (4.7%).
Business challenges
There are further signs that economic conditions are improving in the region. Indeed, the proportion of businesses citing customer demand as a growing challenge eased over the last two quarters but, as in most regions, it is still a prevalent issue, with 33% of East Midlands businesses reporting it as an issue. Regulatory requirements are now the most widespread challenge for businesses in the region with 37% citing this as a growing concern in Q1 2024.
Concerns about the tax burden remain prominent in the region, with approximately a quarter of companies reporting it as growing concern. Other prevalent issues for businesses in the region include late payments from customers (20%) and transport problems (19%).
Labour market
Companies in the East Midlands reported that employment growth slowed slightly to 2.4% in the year to Q1 2024, compared to 2.7% in Q4 2023. However, this was still one of the strongest growth rates in the UK, marginally outpacing the national average of 2.0%. Job growth is expected to moderate further in the coming 12 months to 2.0%, consistent with the UK average and double the historical average of 1.0%.
Despite a marginal slowdown from the previous quarter, salary growth in the East Midlands remains strong at 4.1% compared to the historical average (2.1%). Businesses expect wage growth will slow further as the rate of employment growth falls and the rate of inflation eases further. Salaries are projected to grow at a broadly similar rate to the national average (3.5%) over the next year, rising by 3.6%.
One feature of the East Midlands is that business concerns about labour market challenges that peaked to historic highs after the pandemic, including the availability of management and non-management skills, are of the least concern to businesses in the region compared to all other UK regions and nations.
Input and selling prices, and profits growth
Annual input price growth softened slightly in the East Midlands but remains very high at 5.0% in Q1 2024. This rate was marginally above the UK average of 4.7%. Looking ahead, businesses expect a significant easing of input price inflation to 3.2%, edging closer to the historical average of 2.7%. However, despite this moderation, companies in the region have the highest price growth expectations in the UK; this is likely another factor restraining the improvement in confidence in the region.
High input price inflation combined with strong salary growth resulted in selling prices rising by one of the highest rates in the UK in the year to Q1 2024. The 3.9% increase in prices was ahead of the national average (3.2%) and nearly three-times the historical average of 1.4%. This is likely to be driven, at least in part, by the Manufacturing & Engineering and Transport & Storage sectors, both of which are prominent in the East Midlands, and are sectors that increased their prices above the average rate. While businesses in the region expect to slow the rate of growth over the next 12 months to 2.9%, it is one of the sharpest increases projected in the UK and only slower than the North West.
Despite ongoing cost pressures, companies in the East Midlands recorded profits growth of 2.6% in the year to Q1 2024, matching the historical average. With sales set to improve and input price inflation to continue to abate, companies anticipate profits growth will increase to 4.9% in the year ahead, broadly in line with the UK average of 5.1%.
Investment
After a significant decline in Q4 2023, there was an uptick in annual capital investment to 2.3% in Q1 2024, with the region matching the rate seen nationally. However, companies are much less optimistic about investment over the next 12 months, with growth set to slow to 1.1%, lagging most other UK regions. This slowdown in investment spending could be related to the fact that 58% of businesses in the East Midlands were operating below capacity in the year to Q1 2024, behind only Yorkshire and Humberside.
Companies in the East Midlands also saw the strongest growth in R&D budgets of any UK region in the past year, rising by 3.3%. However, as is the case with capital investment growth, businesses in the region are planning to scale back their budget growth in the coming year to 1.3%, below both the historical average (1.8%) and the national average (1.6%).
