ICAEW Business Confidence Monitor (BCM): West Midlands
Q1 2020: Weak profits growth and widespread spare capacity are impeding investment
Companies in the West Midlands are seeing stronger exports growth than a year ago, but their domestic sales are rising at a slower pace. Profits growth is also subdued, and businesses report significant spare capacity. Against that backdrop, investment rates are muted, despite confidence returning to positive territory in Q1 2020, and this is expected to endure in the coming 12 months.
Business Confidence in West Midlands
At +2.9, business confidence in the West Midlands is now in positive territory for the first time since Q3 2018. Reduced political and Brexit uncertainty are factors helping to explain this improvement.
Domestic sales and exports growth, and spare capacity
The rise in company confidence is also likely to reflect a recovery in exports growth (3.3% year on year), following slight contractions in the last two quarters. In particular, automotive component manufacturers in the region are likely to have seen their exports rise as car manufacturers ramped up production in late 2019 in order to make sales before this January’s new EU legislation on vehicles’ CO2 emissions.
That said, domestic sales growth stands at just 1.1% in Q1 2020, which compares unfavourably to an expansion of 2.8% in the year to Q1 2019 and marks the slowest pace of growth since Q2 2010.
Difficulties in terms of domestic sales performance may also be linked to a higher proportion of businesses operating below capacity than a year ago. This stands at 65% in Q1 2020, significantly higher than the national figure (54%) as well as above the 52% in Q1 2019.
Selling and input prices, and profits growth
Perhaps helped by stronger export demand, businesses are managing to achieve faster increases in selling prices (1.5% year on year) than the UK as a whole. However, these increases continue to be outstripped by input price inflation in the region, which, at 2.4%, is among the fastest rates across the UK. Given these price-cost dynamics, there is significant pressure on margins. Companies report barely any rise in profits in the year to Q1 2020, with an increase of just 0.1% being considerably weaker than anywhere else in the UK.
Weaker profits growth, combined with increased spare capacity, may in turn help to explain why investment rates are subdued among companies in the region. Indeed, growth across capital investment (1.4% year on year), Research & Development (R&D) (1.6%) and staff development budgets (1.2%) are all below their respective national averages.
And the generally restrained investment environment is expected to remain in place for the next 12 months. While an uptick in capital investment growth is expected (to 2.1%), moderations are planned for both R&D budgets (1.0%) and staff development budgets (0.8%).
Businesses also report some rising challenges. Possibly linked to slower domestic sales growth, customer demand is one of the most widespread concerns for businesses, with 38% citing this as a matter of rising concern in Q1 2020. Also, the percentage of businesses reporting increasing difficulties with marketplace competition has been exhibiting an upwards trend in recent quarters, and now stands at 36%.
Prospects for the next 12 months
Sales projections are, however, quite upbeat. Companies forecast significantly faster domestic sales growth (4.1% year on year) than over the past 12 months. And they anticipate similarly robust exports growth to the past year, of 3.7%. These are expected to support a notable rise in profits, with growth of 5.1% forecast for the year ahead.