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 rose again in the North East with the Business Confidence Index reaching its highest level since Q4 2021.
- Domestic sales growth continued to decline while exports improved, but businesses expect growth to accelerate on both measures in the next 12 months.
- Input price inflation continued to slow, however, wage pressures remain high, unlike most nations and regions where they have eased. Businesses project slower increases for both measures in the year ahead.
- Companies are raising their selling prices more slowly and future rises are expected to be lower than most other regions. Yet, profits growth is above the national average in the North East, and well ahead of the region’s historical average.
- Regulatory requirements remain the prominent growing challenge, but staff turnover is now the second-most cited issue by businesses in the region as customer demand eased.
- Capital investment growth has been muted in the North East but is expected to improve. R&D budget growth rose above the historical average, but businesses plan to scale back.
Business confidence in the North East
Sentiment in the North East rose to its highest level in over two years in Q1 2024. The Business Confidence Index rose slightly to +13.4 from +10.8 in Q4 2023 and, although now marginally behind the national score, is the strongest it has been in the region since Q4 2021. Confidence is also above the historical average for the region (+6.3).
Domestic sales and exports growth
Domestic sales growth in the North East continued to fall and, at 2.5% year-on-year in Q1 2024, it is now both below the region’s historical norm of 3.0%, and the UK average (3.3%). However, companies in the North East expect growth to accelerate in the coming year, reaching 5.5%, and above the national average (5.2%).
Exports are up by 2.0% in Q1 2024 compared to a year before. This is consistent with the mild improvement in export sales growth seen in recent quarters, but they remain below the UK average and the historical norm. As with domestic sales, companies in the North East predict a pick up in the pace of increase in the coming year, to 3.5%, though this is weaker than anticipated across all parts of the UK, except the West Midlands.
Business challenges
Regulatory requirements remain the most cited growing issue facing businesses in the North East but the proportion of companies reporting them as a concern dropped back ‒ at 42% in Q1 2024 it is closer to the historical average of 38%, having hit 49% in the previous quarter. This is followed by staff turnover which returned to the above-average rates seen post-covid, rising to 36% having temporarily fallen to 19% in Q4 2023.
Encouragingly, concerns about customer demand, while still the third most prominent growing challenge for businesses in the region, dropped to 32% in Q1 2024, below the historical average of 36%. However, the proportion of businesses in the region citing the tax burden as a growing issue has been on an upward trend and now, at 26%, remains well above the historical average of 14%.
Labour market
Annual employment growth in the North East continues to hover around the historical average for the region, with businesses reporting growth of 1.5% in Q1 2024. Companies in the region plan to increase their labour force more quickly in the coming year, by 2.0%, which is broadly in line with expectations nationwide (2.2%).
Challenges around staff turnover could be one reason why salaries in the North East are rising at the same rate to the previous quarter, unlike most areas in the UK, which have seen growth ease. At an annual rate of 4.4% in Q1 2024, salary growth remains close to the historic high (4.5% achieved in Q1 2023) and is only slightly below the South West and Wales that both recorded salary growth of 4.6% in the latest quarter. Over the next 12 months, companies expect wages growth to moderate significantly to 2.7%, the lowest rate anticipated across all UK regions. Meanwhile, the availability of non-management skills remains prevalent in the North East and, at 28%, was only reported by a larger share of businesses in the South West (29%) in Q1 2024.
Input price, selling prices and profits growth
Annual input price inflation in the North East slowed to its lowest rate since Q2 2022, maintaining the falling trend of recent quarters. At 4.8% year-on-year, input prices in the region are rising in line with the UK average. Businesses in the North East anticipate a sharp slowdown in input price inflation in the coming year, predicting it will rise by only 1.8%, below the average expected by UK businesses (3.0%) and lower than the regional historic average (2.6%).
Selling prices have also eased, but more gradually than the trend seen for input prices. Indeed, businesses in the North East increased their prices by 3.5% in Q1 2024, only 0.2 percentage points lower than in the previous quarter. However, companies anticipate that the expected sharp fall in input prices will feed through to much slower selling price inflation in the region, projecting a rise of 2.0% next year. This is the joint-lowest rate for expected selling price rises alongside Yorkshire and Humberside, and slower than the UK as a whole (2.6%).
Easing cost pressures appear to have helped support profits growth in the region, with companies in the North East reporting the highest profits growth of any region, which accelerated to 4.7% in the year to Q1 2024. This is up from 3.5% recorded in the previous quarter and considerably higher than the historical norm for the region (2.9%). Expectations that inflation will continue to ease and sales growth will bounce back, help to explain the outlook, with businesses anticipating profits growth will accelerate to 5.9% in the year ahead. Indeed, companies in the region are more optimistic about future profits than the national average (5.1%).
Investment
Growth in capital investment spending in the North East picked up in Q1 2024 to 1.8% from 1.5% in the previous quarter, although it remains below the historical average of 2.3%. Businesses plan to boost investment in the year ahead and, with expected growth of 2.2%, is behind only the West Midlands on this measure.
Meanwhile, companies reported that their R&D budgets saw relatively strong growth in the latest quarter, rising by 2.5%, ahead of the national average of 2.0%. But unlike capital investment, companies plan to slow their R&D spending growth to 1.7% next year, which is lower than the historic average for the region (2.0%).
