The latest national Business Confidence Monitor (BCM) for Q3 2023 shows a small decline in business confidence in the quarter overall compared with Q2, although sentiment did rise during the quarter, possibly due to a growing likelihood that interest rates might be at, or close to, their peak. Confidence remains below its 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 26 June to 22 September 2023.
- Companies in the North West are the most positive in the UK, and the Business Confidence Index has remained broadly stable since the last quarter.
- Projected domestic sales growth in the coming year is healthiest in the North West, and while businesses expect improvements in export performance it will continue to lag domestic sales.
- The proportion of companies reporting the tax burden and, even more so, bank charges as a growing challenge has risen recently.
- Competition in the marketplace has also become increasingly problematic while customer demand, regulatory requirements, staff turnover and the availability of non-management skills remain prevalent issues.
- Employment growth is set to continue at around the current rate, and salary rises are expected to slow.
- Businesses in the region are experiencing the weakest annual input price inflation across the UK and selling price increases are lower than in most other regions. Both are expected to moderate in the year ahead, while profit growth is expected to pick up and is set to be faster than elsewhere.
- Companies are slightly more optimistic about increasing capital investment and R&D budgets over the next 12 months than in the last year.
Business confidence in the North West
The Business Confidence Index for the North West stands at +12.1 in Q3 2023, making companies in the region the most optimistic in the UK. Sentiment remains notably ahead of the historical average for the region and has remained largely stable since the last quarter. But businesses are likely to be cautious given the difficulties caused by high interest rates, persistent inflation and other challenges.
Domestic sales and exports growth
Domestic sales were 4.1% higher in Q3 2023 than a year ago, broadly in line with the UK average. Companies in the North West are the most optimistic across the UK about prospects for the year ahead, with expected growth of 6.0%. This is twice as fast as the historical average achieved within the region.
Export growth has been on a rising trend since early 2021 and, although it is slower than domestic sales, the pace picked up once again in the year to Q3 2023 and is running at 3.3%. Businesses in the region are among the most reliant on the EU market for exporting goods, so it is possible that companies are adjusting to Brexit-induced trade disruptions and practical problems at the border under the new regime. Companies in the North West anticipate growth to continue over the next 12 months, at 3.9%, which, if achieved, would be above the region’s historical average.
Financial challenges relating to bank charges and the tax burden have been on a rising trend over recent quarters. This is particularly true for bank charges, with a higher proportion of businesses reporting them as a growing concern than seen in over a decade. This is likely explained by the tighter financial conditions seen in recent quarters. Indeed, around one in five businesses in the North West report the tax burden and bank charges as an increasing source of difficulty.
Competition in the marketplace has also become increasingly problematic for companies, and around one in three cited it as a growing issue in the latest quarter. Regulatory requirements, staff turnover and the availability of non-management skills are also still major issues concerning businesses in the region. But customer demand remains the most widespread challenge for companies in the North West, with 39% citing it as a growing issue.
Companies plan to raise staff levels over the next 12 months by 2.4%, which is similar to the past year. This would be ahead of both the historical average for the region and that expected for the UK on average. Salaries continue to rise, by 4.5% year-on-year in Q3 2023, reflecting a combination of persistent inflation, increasing employment and ongoing labour market challenges. Over the next 12 months companies expect the rate to slow to 3.5%.
Input and selling prices, and profits growth
Businesses in the North West continue to face cost pressures, though these have eased in recent quarters. Annual input price inflation is now running at 5.1%, year-on-year, in Q3 2023, and is lower than the rest of the UK. However, it remains twice as fast compared to the average pace seen historically in the region. Businesses in the North West expect costs to moderate considerably over the next 12 months to 2.4%.
Companies in the North West have lifted their selling prices at a slower pace than most parts of the UK. They expect to lower the rate of increase from 3.7% in the year to Q3 2023, to 2.6% over the next 12 months, as growth in salaries and input costs moderate.
Profits have risen by 3.6% year-on-year to Q3 2023, but businesses in the North West expect them to pick up significantly over the next year to 5.9%, which is a more optimistic outlook than elsewhere in the UK.
Growth in capital investment has weakened in recent quarters. At an annual rate of 1.0%, it is slower than any other UK nation or region, and is half the pace of the historical average for the North West. Companies are, however, slightly more upbeat about prospects for the next 12 months, with plans to increase capital investment by 1.7%. Meanwhile, companies also expect to lift their R&D budgets, with growth of 2.1% in the year ahead, up from 1.1% in the year to Q3 2023.