The latest national Business Confidence Monitor (BCM) for Q4 2023 shows a slight shift in sentiment within the quarter. However, the quarter-on-quarter improvement in sentiment is marginal, remaining broadly steady at a similar level over the last few quarters. Overall confidence continues to fall short of the pre-pandemic average.
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 17 October to 15 December 2023.
- Companies in the North East are among the most optimistic in the UK, with the Business Confidence Index having increased notably in Q4 2023. The rebound seen in the automotive sector, which is important to the region’s economy, may help to explain this.
- Growth in domestic sales has been trending down in recent quarters, while exports continue to rise at a similar rate to Q3 2023. Businesses expect faster growth on both measures over the coming year.
- Input price inflation is easing, a trend maintained over recent quarters, though the pace is joint-fastest with Scotland and the South East. Salaries are rising at a similar rate to Q3 2023, unlike most nations and regions where growth has eased. Businesses expect slower increases for both measures in the year ahead.
- Companies have been raising their selling prices, though more slowly than in previous quarters. In the year ahead, businesses plan to lift selling prices faster than most areas in the UK. Profits growth is joint-strongest in the North East, with further uplift expected. Together these factors may have helped to boost overall sentiment.
- Regulatory requirements are the most cited growing challenges, followed by customer demand, which has been trending upward recently. Concern about the tax burden has reached a record high and is more prominent than elsewhere in the UK, as is the availability of management skills and transport problems.
- Capital investment growth has fallen away in the North East, while R&D budget growth has stayed level with the previous quarter. Both measures are expected to grow by similar levels over the next year, trending below historical averages for the region.
Business confidence in the North East
Sentiment in the North East strengthened in Q4 2023, with the Business Confidence Index now at +10.8 ‒ a notable jump from +1.6 in the previous quarter. Companies in the North East are among the most optimistic about prospects over the next 12 months. This is likely supported, in part, by the rebound seen in the automotive sector, which is particularly important to the region’s economy.
Domestic sales and exports growth
Domestic sales growth in the North East has eased for the second consecutive quarter. At 3.4%, year-on-year, in Q4 2023, it is still ahead of the region’s historical norm of 3.0%, and broadly in line with the UK average. Companies in the North East expect growth to accelerate in the coming year, reaching 5.0%.
Exports are up by 1.6% in Q4 2023 compared to a year before. While this is consistent with the rate achieved in the previous quarter, it lags both the UK average and the region’s historical norm. Although, as with domestic sales, companies in the North East predict a pick up in the pace of increase in the coming year, to 3.7%, aligning broadly with the expected rate for the UK as a whole.
Both domestic and export sales expectations are favourable to the historical standard for the region, and these outlooks are likely to have provided a boost to confidence in the region.
Regulatory requirements are the most cited growing issue for businesses in the North East. Indeed, the proportion of companies reporting them rose considerably in Q4 2023, standing at 49%, up from 33% in the previous quarter. It is followed by customer demand, which has also been rising over recent quarters and is flagged by 39% of companies.
Companies in the North East are also battling financial challenges related to the tax burden, which has been trending up since the end of 2020. With more than one in three companies reporting the tax burden as a growing challenge, it is now at a new record high and is more prevalent in the North East than elsewhere in the UK. That said, issues around bank charges appear to be easing, a trend maintained over recent quarters, and is edging closer to the region’s historical standards.
The availability of management skills and transport problems are also more prevalent in the North East than in any other nation and region in the UK, and both may have started to re-emerge as difficulties for companies in recent quarters. On the other hand, the proportion of companies citing the availability of non-management skills has dropped considerably in Q4 2023 compared to the previous quarter, though it remains a prominent concern in the region.
Annual employment growth in the North East has been largely stable over recent quarters, though it eased considerably in Q4 2023 compared to the previous quarter. At 1.0% in Q4 2023, it is broadly consistent with the region’s historical norm. Businesses in the region plan to increase their labour force more quickly in the coming year, by 1.5% but, like the current rate of outturn, this is modest compared to most other nations and regions in the UK.
Salaries in the North East are rising at a similar rate to the previous quarter, unlike most areas in the UK, which have seen growth ease. At an annual rate of 4.4% in Q4 2023, salary growth remains close to the historic high (of 4.5% achieved in Q1 2023) and is joint-fastest with the East Midlands. Over the next 12 months, companies expect slower increases in salaries, at 3.7%, but even this would be high by historical standards.
Input price, selling prices and profits growth
Annual input price inflation in the North East eased in Q4 2023, a trend maintained in recent quarters. But at 5.4%, year-on-year, input prices are rising joint-fastest in the North East, alongside Scotland and the South East. However, companies in the North East predict further slowdowns in the coming year, to 3.1%, bringing the pace of increase closer to the region’s historical average (2.6%).
Businesses in the North East have also experienced similar trends in terms of selling prices, which are now 3.7% higher in Q4 2023 than a year ago. This is slower than the past four consecutive quarters and they are expected to moderate further in the year ahead to 2.9%. Indeed, selling prices are anticipated to rise faster in the North East than in most nations and regions in the UK.
Companies in the North East reported the joint-strongest profits growth across the UK, which accelerated to 3.5% in the year to Q4 2023 compared to the previous quarter. Expectations of easing cost pressures and higher selling prices, in part, help to explain the outlook, with businesses anticipating profits growth will accelerate to 5.1%. The expectation is considerably ahead of the historical norm achieved in the region (2.9%). Optimism around future profit growth is likely another factor driving business confidence in the region.
Growth in capital investment spending in the North East halved to 1.5% in Q4 2023 compared to the previous quarter, while R&D budgets continued to grow in line with previous quarters, also at 1.5%. Companies plan to raise their capital investment spending and R&D budgets in the next 12 months, but at a similar pace to current rates, and continuing to lag the region’s historic average on both measures.