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.
- Sentiment in the East Midlands has remained steady in recent quarters and is slightly above the region’s historical norm and the national average.
- Domestic sales growth continued its recent downward trend, broadly tracking the national performance, while exports fell more markedly. Companies expect growth to pick up in the next 12 months for both domestic and export sales.
- Employment growth has been faster in the East Midlands than other parts of the UK but companies anticipate slower workforce expansion in the year ahead.
- Input price inflation appears to have passed its peak and continues to ease, with further moderation expected in the coming year. Salary increases are also expected to slow.
- Selling price inflation has eased, though the rate of increase is joint-fastest in the UK. Businesses anticipate the pace to moderate further.
- Customer demand and regulations are the joint-most widespread growing challenges, and the tax burden remains a major issue. Concerns over staff turnover continue to soften.
- Growth in capital investment spending dropped, but improvements are expected in the coming year, while businesses plan to moderate R&D budgets. The region has a higher share of businesses operating below capacity, which may mean there is less incentive for companies to invest to expand output.
Business confidence in the East Midlands
The Business Confidence Index for the East Midlands has been largely stable over recent quarters. At +4.9 in Q4 2023, it is just ahead of the UK average (+4.2) and the region’s historical norm (+3.8).
Domestic sales and exports growth
Domestic sales growth in the East Midlands has eased markedly, a trend maintained over recent quarters. At 3.7%, year-on-year, in Q4 2023, growth has been favourable compared to historical standards for the region (2.9%) and broadly aligns with the UK average. Companies are more optimistic about the outlook and expect growth to pick up somewhat in the next 12 months, to 4.3%. Healthy domestic sales in Business Services, a growing sector in the East Midlands, are likely to underpin this.
Annual export growth, however, has fallen more sharply to 1.0% in Q4 2023. While this performance is less than half the national rate (2.1%) and the historical average (2.6%), companies predict a notable improvement in the coming 12 months, anticipating an acceleration of export growth to 3.9%. This is among the fastest predicted rates across the UK.
Business challenges
Customer demand is the joint-most widespread issue in the East Midlands, with 36% of companies citing it as a growing challenge. Regulatory requirements are equally as pressing for companies in the region. Indeed, the proportion of businesses reporting each concern is broadly in line with the region’s historical average and the national rate. Meanwhile around one in four companies in the East Midlands report the tax burden as a rising issue, which is notably above historic norms for the region (16%).
Some concerns have eased over recent quarters. The proportion of companies in the East Midlands citing staff turnover as a growing challenge has largely been trending down over recent quarters, standing at 17% in Q4 2023. Indeed, it is less prevalent in the East Midlands than any other nation and region in the UK and is slightly below the historical norm for the region (20%). Concerns about the availability of both management and non-management skills have also broadly stabilised or softened in recent quarters.
Labour market
Unlike most nations and regions in the UK, businesses in the East Midlands have expanded their labour force in the year to Q4 2023 at a faster rate than in the previous quarter. Employment growth in the East Midlands is faster than elsewhere in the UK and, running at 2.7% in the year to Q4 2023, it is more than twice the pace of the region’s historical average. Relatively strong domestic sales may have supported this growth. However, companies in the region expect growth to moderate over the next 12 months, to 1.6%, bringing it in line with the predicted rate for the UK.
Strong labour demand is reflected in salary growth in the East Midlands, with wages rising at near record levels and 4.4% higher in Q4 2023 than a year ago. Indeed, this rate of growth is joint-fastest with the North East and, though businesses anticipate a slight slowdown in the coming year, to 4.1%, the East Midlands has the highest predicted salary growth across the UK.
Input and selling prices, and profits growth
Annual input price inflation in the East Midlands has softened for the third consecutive quarter, suggesting it may have peaked. That said, it remains high by historical standards for the region and is running at 5.3%, more than twice the pace historically. Companies in the East Midlands anticipate lower rises in input prices over the next 12 months (3.4%), however, it is above the predicted rate for most nations and regions in the UK.
With salaries and input costs remaining elevated, businesses continue to increase their selling prices, though at a much slower rate than the previous two quarters, suggesting it has passed its peak. Selling prices are now 3.9% higher in Q4 2023 than a year ago ‒ the joint-fastest rate in the UK. Businesses anticipate this will moderate further to 2.3% in the next 12 months, bringing them closer to the region’s historical average (1.4%) and among the slowest predicted rates in the UK. The net result is that profits growth is running at 2.5% in the year to Q4 2023 and has remained fairly steady since the previous quarter. Businesses forecast faster profits growth in the next 12 months (4.2%).
Investment
Annual capital investment spending growth in the East Midlands slumped to 0.7% in Q4 2023, a notable downgrade from the previous quarter. The region is among the weaker performers across the UK, behind only the South West. This is likely to be explained, in part, by a higher share of businesses operating below capacity in the region than elsewhere in the UK, meaning there is less incentive to invest, but another factor could be the tax burden which remains a prevalent challenge. However, businesses expect to raise their capital investment spending by 1.6% over the next year, bringing it closer to the region’s historical average (1.9%).
Companies are lifting R&D budgets at a similar rate as the previous quarter and are 1.4% higher in Q4 2023 than 12 months before. The outlook is less optimistic as businesses anticipate a slower rate of increase (0.8%) over the coming year, and is weaker than expected in many other parts of the UK.