ICAEW Business Confidence Monitor (BCM): East Midlands
Q1 2020: Businesses plan to restrict investment spending as profits growth slows
Despite showing improvement, business confidence is still below zero across the East Midlands. Sales growth is unremarkable when compared to the historical average for the region, and a high percentage of companies continue to report elevated stock levels. Profits growth stands among the weakest in the UK. Looking to the year ahead, businesses expect improved sales growth but nevertheless plan to restrict their investment spending.
Business Confidence in East Midlands
Business confidence in the East Midlands stands at -1.0 in Q1 2020, a marked improvement from -23.7 last quarter, but still below the UK average. While businesses do have improved clarity over the UK’s withdrawal from the EU, there is still significant uncertainty over the specifics of the UK-EU trade negotiations, something that may be weighing heavily on the region’s manufacturing sector.
Exports and domestic sales growth
Sales performance among businesses in the region is unspectacular. There has been little improvement in the pace of domestic sales growth (2.5%) when compared to a year ago. And while exports are rising by a faster rate (2.8%) than they were a year ago, they remain in line with the historical average for the region.
Stocks remain above normal levels for a high proportion of companies in the region. Indeed, for companies in the East Midlands that operate in the Manufacturing, Construction and Transport & Storage sectors, the percentage with above normal levels of raw and intermediate goods remains elevated when compared to their historical averages. Similarly, the percentage of businesses in these sectors also report above normal levels of finished goods - the highest for any region in the UK. This suggests that companies are struggling to bring their stocks down to more normal levels, now that the fear of an immediate ‘hard Brexit’ have been removed ─ at least for the time being.
Against this background, profits growth is subdued, at only 1.0% in the year to Q1 2020. This partly stems from increasing pressure on margins¬ ─ a particularly challenging issue for the region. Selling price increases of just 0.4% are the weakest across the UK, while input price inflation of 2.6% is the highest for any UK region.
No doubt influenced by the squeeze on margins, businesses are restricting their investment expenditure. Capital spending is rising by 1.6% year on year in Q1 2020, a slower pace than the 3.0% seen in Q1 2019. Research & Development (R&D) budgets are up by 2.0% over the last 12 months, following an increase of 3.7% in the year to Q1 2019. And the level of staff development spending is barely changed (up 0.2%) from a year ago, reflecting little change in employment in Q1 2020, year on year.
Businesses also plan to limit investment growth over the year ahead. Capital investment is set to grow at a similarly muted rate (1.8%) to this year, while R&D budgets are projected to rise by only 1.1% in the 12 months to Q1 2021, so almost one percentage point down on the past year. And while staff development spending is expected to pick up, growth of only 0.9% is among the weakest across the UK.
Prospects for the next 12 months
On the bright side, companies foresee improvements in sales in the year ahead. Domestic sales and exports are projected to increase at the faster rates of 3.8% and 3.4% respectively. Input price inflation is also expected to ease, to 2.1%. This combination largely explains why profits are forecast to expand by 3.6%.