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Economic Insight

ICAEW Business Confidence Monitor (BCM): East Midlands

Business confidence falls further into negative territory

The latest Business Confidence Monitor (BCM) shows business confidence falling further. Difficult economic conditions continue, though there has been some easing in the political turmoil of the previous period, which seriously unsettled financial markets. As a result, some economic stability has been restored, even though September’s events have resulted in higher interest rates, taxes and government borrowing, and lower government spending. But the global economic background continues to look very challenging.

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 interviewing is continuous, the latest findings are based on the period 17 October to 16 December 2022.

  • The Business Confidence Index continues to slide further into negative territory. It is now at its lowest recorded level in 14 years and below the UK average.
  • Domestic sales have been rising sharply, but growth is expected to moderate over the next year. In contrast to the UK outlook, export growth is expected to decelerate, with the region having the weakest forecast across the UK.
  • Marketplace competition is now a very widespread growing challenge, as is customer demand. Bank charges are also coming to the fore.
  • The availability of management and non-management skills are easing as challenges for companies, though both remain high. The same is true for staff turnover.
  • This may help explain why employment growth is outpacing all other UK nations and regions. Salary growth is elevated compared with historical norms, but is expected to rise at a slower rate than in all other regions, except for the West Midlands.
  • Input price inflation is strongest in the East Midlands. A slower rise is expected in the coming 12 months, although this still exceeds the UK average.
  • The investment outlook is concerning for the East Midlands. This is the only UK nation or region in which companies plan to reduce the level of both capital investment and Research & Development (R&D) budgets.

Business confidence in the East Midlands

The Business Confidence index for the East Midlands continues to slip further into negative territory. The index has fallen to -25.3, the lowest recorded reading since Q1 2009.

Domestic sales and exports growth

In the most recent survey period, domestic sales rose by 7.8%, the fastest rate of growth since the survey began in 2004. This is also the strongest increase across all UK nations and regions. In the coming 12 months, businesses expect the pace of domestic sales growth to moderate to 5.1%, but this still outpaces the UK average. The story for exports is markedly different. A rise of 3.8% in the year to the latest survey is slightly slower than the rate of growth for the UK as a whole. And companies anticipate a rise of only 2.1% in the coming 12 months, in contrast to the national outlook in which exports growth is forecast to strengthen. This is also the most subdued outlook of any region: a concerning development, given that businesses in the East Midlands are among the most export-intensive across the UK. 

Business challenges

The very modest expectations for export growth may be linked with marketplace competition being among the most widespread challenges for companies. Indeed, 29% of businesses cite this, the joint highest rate across all UK nations and regions, along with the North West. Customer demand is also one of the most prominent growing challenges in the region, with 35% of companies reporting this as a more pressing issue.

Although historically a fairly minor challenge, bank charges have now become a more prevalent issue. In the latest survey, 20% of businesses cited them as a growing source of difficulty, the highest rate of incidence since Q2 2011, and probably as a result of increasingly difficult financial conditions following the short-lived Truss premiership. Challenges resulting from regulatory requirements are also exhibiting an upwards trend, following a period during the pandemic when concerns in this area eased off. In the latest survey, 38% of companies report being increasingly challenged in this area. Only in Scotland, London and the North East is the issue more widespread.

Labour market challenges, on the other hand, are easing in the region after surging to record highs in 2022. The percentages of companies citing the availability of non-management skills (35%) and management skills (22%) are both now back to rates seen in late 2021. The latter of these is less widespread than in any other UK nation or region except for the South West. A very similar story is apparent for staff turnover.

Labour market

The easing of recruitment difficulties for businesses is associated with employment growth in the East Midlands outpacing all other UK nations and regions. Employee numbers are up by 3.9%, the fastest rise since the survey began in 2004. Businesses do, however, plan to moderate the pace of employment growth in the year ahead to 2.2%, in line with the outlook for the UK as a whole.

Consistent with the easing of labour market challenges, salary growth is expected to be less pronounced in the East Midlands than in most other UK nations and regions. Businesses plan to increase salaries by 3.9% in the 12 months ahead, the second weakest outlook across the UK, behind the West Midlands, but nevertheless elevated in comparison to historical norms, due to the current high rate of inflation.

Input and selling prices, and profits growth

Ongoing disruptions to supply chains and high commodity prices mean that businesses in the East Midlands are dealing with very strong cost pressures. Annual input price inflation is the fastest (6.4%) across all of the UK. The region’s large manufacturing sector has been particularly sensitive to sharp rises in input prices. Over the next 12 months, input price inflation is expected to ease down to 5.1%, although this is still stronger than the UK-wide average.

In response to the marked rise in input costs, selling prices charged to customers are rising at the fastest rate (4.2%) since the start of the survey in 2004. In the year ahead, a softer increase of 3.3% is planned, possibly reflecting expectations of an easing of input price pressures. The net effect of these price-cost dynamics, coupled with healthy domestic sales gains, is that profits growth remains positive. Profits are up 6.0% in the latest survey period, outstripping all other UK nations and regions. A more moderate 3.6% increase is forecast in the 12 months ahead, likely stemming from the anticipated slowdown in sales growth.

Investment

The weakness in business confidence, as well as a very challenging macroeconomic setting, appears to be feeding through to investment plans. In the latest survey period, annual capital spending is up by 3.0%, a slightly slower pace than the UK average. R&D budgets are up by 3.5%, the fastest rate across the UK. However, in the coming 12 months both forms of spending are set to be cut. The East Midlands is the only UK region where that is the case. Capital spending is expected to decline by 1.3% and R&D budgets are forecast to contract by 0.4%. The fall across both types of investment spending is a very concerning trend, given the importance that both have for product development and boosting productivity and, therefore, the competitiveness of businesses in domestic and international markets.