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ICAEW Business Confidence Monitor (BCM): East Midlands

Q2 2021: Strong sales outlook lifts business confidence higher

  • East Midlands companies endured a dismal past 12 months, suffering some of the biggest contractions in domestic sales and exports across the UK.
  • Spare capacity has been widespread, and profits have declined, although this has been moderated by lower labour costs.
  • Businesses report a range of challenges. Customer demand, regulatory requirements and transport problems are among the most prominent issues.
  • Looking forward, however, the region’s Business Confidence Index has moved further into positive territory, with companies upbeat about future prospects.
  • Although there are risks to the outlook, sales and profits are projected to rebound in the year ahead. Employment levels should also increase. 
  • After being cut during the pandemic, investment spending should also pick up, although at a slightly more modest pace than for sales and profits.

The Business Confidence Index for the East Midlands has moved well into positive territory in Q2 2021, standing at +38.6. Businesses in the region have faced unprecedented challenges over the past year, but the majority are now optimistic about conditions. The pace of the vaccine roll-out and the prospect of a rebound in economic activity have clearly helped to lift sentiment here. 

Exports and domestic sales growth, and spare capacity

The sales environment has been challenging over the past year as the pandemic has depressed both domestic and international demand. Businesses in the region are among the most export-intensive across the UK, so it is worrying that exports have suffered a year-on-year contraction of 2.1%, significantly more than nationally. The region is particularly reliant on vehicle exports, an area that has been badly hit due to containment measures across the world. Domestic sales have also contracted at a steeper rate than the UK average, falling by 2.2% in the year to Q2 2021. Reflecting this, the region has the joint highest proportion of businesses across the UK operating below capacity. 

Profits growth and labour costs

Sharp declines in sales have filtered through to profits, which have sunk by 5.7% over the past year. Not only is this the sharpest fall across the UK, but also the deepest drop in the region on record. It is likely that the decline would have been even more severe if not for a reduction in labour costs. While the furlough scheme had provided support, costs have been lowered through both average total salaries (-0.9%) and employee numbers (-2.6%) falling at faster rates than anywhere else in the UK. 

Investment

Given the financial pressures businesses have faced during the pandemic, and the challenging sales environment, investment rates have been restricted. Despite being hugely important for the global competitiveness of the region’s large automobile and aero-engine sectors, Research & Development (R&D) budgets are broadly the same as a year ago. With weak demand and widespread spare capacity, capital investment is 1.1% below its level in the year to Q2 2020.

Business challenges

As well as ongoing uncertainty surrounding the pandemic, businesses report a host of growing challenges. Customer demand remains a rising challenge for 53% of businesses, by far the highest rate across the UK. 

The proportion of businesses citing regulatory requirements as a growing challenge is trending upwards. This is probably partly explained by the difficulties some businesses have had in adapting to COVID-related restrictions and guidelines. Challenges in adjusting to new customs and logistical changes in the post-Brexit trading environment may also be weighing heavily on some exporting businesses.  

Among other key challenges facing companies in the region, the proportion citing growing transport problems has risen dramatically over the past year, from a mere 3% a year ago to 31% in Q2 2021. Clearly containment measures and, linked to that, freight capacity shortages have impeded the ability of businesses to operate and service markets. Brexit port delays may also have disrupted transport networks. In addition, the squeeze that the pandemic has placed on company finances helps to explain why late payments remain a prominent challenge for companies in the region, with 28% reporting this in Q2 2021.  

Prospects for the next 12 months

Despite the struggles of the past year, the sharp rise in the Business Confidence Index indicates that the large majority of companies in the region are optimistic about the year ahead. Businesses expect a sharp rebound in sales performance as lockdown measures are eased and economic conditions normalise. Domestic sales are set to grow by 7.9% over the next 12 months. Export growth will, however, be more modest at 2.7%, possibly reflecting the slower distribution of vaccines in important European markets and also some trade frictions stemming from Brexit. 

Companies expect the overall upturn in sales to lead to employment growth of 1.2%. They also plan to increase all forms of investment spending over the next 12 months, supported by a 9.4% rise in profits. Growth is set to be fastest in capital investment (2.8%), although this will not exceed the national pace, with widespread spare capacity in the region meaning that many companies will not need to immediately expand their capital stock to meet rises in demand.