The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits in the year ahead.
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 April to 22 June 2024.
- Wales experienced the largest drop in confidence of any UK region in Q2 2024, dropping from +18.4 in Q1 2024 to +5.0, with sales expectations and local political and economic factors weighing on sentiment.
- Wales recorded the highest annual domestic sales growth and above-average exports growth in the year to Q2 2024, but Welsh companies are the least optimistic about future sales and customer demand was the most prevalent growing challenge faced by businesses, undermining their confidence.
- Alongside customer demand challenges, businesses in Wales are also concerned about regulatory requirements and the growing tax burden.
- Cost pressures continued to ease for Welsh businesses, but input price inflation and salary growth remained slightly above the national average. Companies forecast these cost pressures will soften in the year ahead.
- Employment has grown rapidly in Wales over the past year and businesses plan above average expansion over the next 12 months, but the availability of non-management skills is a prominent growing concern.
- Despite relatively low confidence, businesses in Wales increased capital investment spending more than most other regions. Companies expect investment growth to continue to outpace the national average while significantly scaling back their R&D growth.
Business confidence in Wales
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Sentiment in Wales dropped significantly in Q2 2024. The Business Confidence Index dropped to +5.0, down from +18.4 in the previous quarter. Even with this drop, sentiment was still marginally above the historical average for Wales (+3.2) but lagged the UK average (+16.7). Welsh companies reported a strong year to Q2 2024, with robust increases in sales, employment and profits, however, factors including the uncertainty surrounding the future of the Tata steel works, weak manufacturing performance, and the resignation of the First Minister may have dented business confidence in Wales.
Domestic sales and exports growth
Domestic sales growth in Wales outpaced all other parts of the UK in the year to Q2 2024, with a 6.5% increase. However, businesses are anticipating sales growth will soften significantly in the coming year, with the region expecting the weakest growth in the UK at 3.7%.
Export sales growth also picked up in the year to Q2 2024, rising by 3.1% and matching the national average. Looking ahead, Welsh companies are the least optimistic about export growth over the next year in the UK, forecasting growth of just 2.2%, below the historical average of 2.8%. Relatively weak sales and exports projections by Welsh businesses are likely linked to the headwinds facing the locally important Manufacturing & Engineering sector, which recorded the second lowest confidence of all sectors in Q2 2024.
Input and selling prices, and profits growth
Companies in Wales reported that input price inflation softened slightly in Q2 2024, but at 4.8% the rate is above the UK average (4.4%). Significant moderation is anticipated for the year ahead, with a 2.9% increase expected, still marginally ahead of the 2.7% historical average.
Annual selling price inflation eased slightly in Q2 2024 to 3.9%, but this increase was still among the sharpest in the UK, with only the West Midlands experiencing faster price growth. Businesses expect to moderate price growth over the next year to 2.5% but this will still be marginally ahead of the national average (2.3%) and significantly above the historical average of 1.5% for the region.
Strong sales and easing cost pressures boosted profits growth in the year to Q2 2024, with Welsh companies recording the sharpest rise in profits in the UK, at 4.5%. Further uplifts in profits growth are expected over the next year, rising to 5.3% but slightly below the projected national average (5.5%). However, the predicted profits growth is still over double the regional historical average (2.5%).
Labour market
Businesses in Wales recorded the strongest increase in employment in the UK over the year to Q2 2024, with a rise of 3.7%. This increase was over three times the historical average (1.2%) for the region. Over the next 12 months, growth will moderate slightly to 2.7%, however this will still be one of the sharpest increases of any UK nation or region.
Welsh companies reported a modest slowdown in salary growth in Q2 2024, with an increase of 3.8%. Despite this softening, wages growth was still nearly double the region’s historical average of 2.0%. Companies in Wales expect to increase salaries at a broadly similar pace to the national average (3.2%) in the coming year, with an anticipated rise of 3.1%.
The availability of suitably skilled staff could be a potential barrier to future employment growth and exert upward pressure on salaries, with 29% of Welsh businesses citing the availability of non-management skills as a growing challenge in Q2 2024.
Business challenges
Consistent with relatively weak expectations about future sales, there has been a notable rise in the proportion of companies citing customer demand as a rising issue in Wales. It is now the most widespread growing challenge for businesses with 43% of them reporting it as an area of growing concern in Q2 2024, behind only the East Midlands.
After a slight decline from the previous quarter, regulatory requirements are now the second largest growing concern facing companies in Wales, with 42% of companies citing them as a rising issue. Worries about the tax burden are also prominent and 40% of Welsh businesses reported that they faced greater difficulty in Q2 2024, more than any other nation or region.
Investment
Companies in Wales raised their capital investment spending at a faster rate than most other UK nations and regions in the year to Q2 2024. The region’s 2.8% increase was only lower than the growth reported in the South East. Welsh businesses expect to increase investment by 2.6% over the next year, continuing to outpace the region’s historical average of 1.9%. The 1.6% growth in R&D budgets over the year to Q2 2024 was broadly in line with the region’s historical average of 1.7%. However, businesses plan to scale back growth in R&D budgets in the coming year to just 0.9%, with the region set to see the slowest budget growth in the UK.
