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Economic Insight

ICAEW Business Confidence Monitor (BCM): North West

Q1: Business confidence rebounds to highest level for over two years

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.

  • The Business Confidence Index for the North West climbed to +24.9 in Q1 2024, up from +3.9 in Q4 2023.
  • The North West was among the weakest regions in terms of domestic sales growth and saw the slowest export growth in the past 12 months, but businesses are optimistic for significant improvement in the coming year.
  • Input cost inflation slowed in Q1 2024 but businesses expect input cost rises to remain higher than most other regions. Salaries continued to rise at near record rates and growth is expected to remain above the historical average in the year ahead.
  • With falling inflation and an expectation of strong sales to come, companies are predicting the largest rise in profits next year of any UK region.
  • Regulatory requirements were the largest growing concern for North West businesses. The survey responses also highlight significant marketplace competition and challenging customer demand, suggesting that, while businesses are optimistic, the trading environment remains difficult.
  • The North West is the only region expecting to increase capital investment and R&D budgets in the coming year at a faster rate than in the past 12 months.

Business confidence in the North West

Sentiment in the North West improved significantly in Q1 2024, and the Business Confidence Index is now at +24.9, bouncing back from a slight fall in the previous quarter. The North West is now one of the most confident regions, behind only Yorkshire & Humberside, and is well ahead of both the national average (+14.4) and its historical average (+5.8). Despite ongoing challenges, including relatively weak recent sales performance, the confidence index is at its highest level since Q3 2021.

Domestic sales and exports growth

Domestic sales growth has fallen sharply in Q1 2024, at 2.2%, representing one of the lowest growth rates across the UK, and the lowest in the North West since Q2 2021. But companies in the North West are among the most optimistic in the UK and anticipate an increase in domestic sales of 6.4% over the next 12 months, over double the historical average for the region (3.1%).

Along with muted growth in domestic sales, export performance in the North West has been disappointing in the last quarter. Export sales increased by 0.2% in the year to Q1 2024, the lowest rate of all UK nations and regions. This is likely due to the relatively weak export  performance of the Manufacturing & Engineering sector, which accounts for a large proportion of regional output. However, businesses in the North West predict a strong increase in exports over the next 12 months, at 5.0%, ahead of most nations and regions.

Business challenges

Regulatory requirements continue to be the main obstacle for businesses in the North West. In Q1 2024, 44% of companies considered regulatory requirements a greater challenge to their performance. Marketplace competition and customer demand are also among the most widely reported challenges, suggesting a tight trading environment, exacerbated by high inflation and weaker domestic and global demand. Concerns raised over transport are more predominant among businesses in the North West than in many other regions, and were reported by 22% of businesses in Q1 2024.

Labour market

Businesses expanded their workforce by 1.5% in the 12 months to Q1 2024. But although this represents a slowdown compared to the last quarter, businesses plan to meet growing sales demand by increasing their staffing levels, with employment growth in the region projected at 2.5% for the coming year. This is over twice the historical average rate of the region (1.2%) but close to the expectation across the UK (2.2%).

Despite a slight deceleration in Q1 2024 to 4.2%, salaries in the North West continue to grow at more than twice the historical average pace for the region (2.0%), largely driven by wider inflationary pressures and above average pay growth in the Manufacturing & Engineering and Transport & Storage sectors. However, salary growth is also projected to decline, yet remaining higher than the historical average for the North West, at 3.5%.

Input and selling prices, and profits growth

The rise in input prices eased over most of 2023, but the growth rate remains considerably higher than the North West’s historical average (3.0%). Input prices grew by 4.9% in Q1 2024, but businesses anticipate further deceleration over the next 12 months to 3.2%. However, despite projecting a slowdown in both input prices and salaries, businesses in the North West remain cautious and do not plan to significantly reduce the pace at which they are lifting their prices. In Q1 2024, selling prices grew by 3.2% in the North West, and businesses expect an average 3.1% growth in the next 12 months, the highest growth of any UK nation and region and much higher than the historical average (1.3%).

It could be the case that businesses in the region intend to maintain their selling prices growth to improve profits growth, which dipped to just 0.1% in Q1 2024. This represents the lowest growth of all nations and regions. Alongside the anticipated improvement of economic conditions in the next 12 months, businesses are optimistic that profits growth will bounce back, forecasting them to grow by 6.7% in the next 12 months, the highest expected rate in the UK.

Investment

Capital investment growth in the North West has been the weakest of all nations and regions in the latest quarter, running at 1.6% in Q1 2024. This is also below the historical average for the region (2.1%). Alongside this, investment in innovation has also been subdued. R&D budgets increased by 1.6% in Q1 2024, below the historical average for the North West.

However, the North West is the only region where businesses are planning an increase in the growth of both capital investment and R&D budgets in the coming year. Capital investment is projected to rise by 2.1% in the next 12 months, and R&D budgets by 1.9%. Although positive, these rates are still expected to be below or on par with historical average growth rates for the region.

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