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ICAEW Business Confidence Monitor (BCM): East Midlands

Q1 2019: Business confidence hit by subdued sales growth

With a backdrop of Brexit uncertainty, weaker company confidence may partly reflect a slowdown in domestic sales, exports and profits growth. Linked to this, businesses are expressing growing concerns over customer demand and competition. For the year ahead, companies are planning to curb investment growth, despite expectations of faster sales and profits expansions.

 

Business confidence trend in East Midlands

Company confidence in the East Midlands is in firmly negative territory in Q1 2019. At -15.5, the Confidence Index is at its lowest in two years. Continued Brexit uncertainty and concerns over global trade are likely to be weighing heavily on the region’s large manufacturing sector. 

Exports, domestic sales and sales volume 

Lower business confidence this quarter may also partly reflect subdued sales performance. Indeed, growth in both domestic sales (2.3%) and particularly exports (1.7%) compare unfavourably to the increases of 4.5% and 4.2% achieved a year ago. And the rise in sales volume of 2.6% is among the weakest in the UK.  

Business challenges

In line with slower sales, competition and demand are increasing challenges for businesses. In the East Midlands, 41% of companies cite marketplace competition as a rising issue in Q1 2019, up from 32% in the 12 months to Q1 2018. The proportion of businesses reporting growing concern over customer demand has also risen sharply in the past year.

Capacity

Weaker demand conditions are also consistent with the recent upward trend in the proportion of companies that are operating below capacity within the region. At 62% in Q1 2019, this is significantly above the 50% reported nationally. 

Selling prices, costs and profits

Slowing sales growth and rising concerns over market demand and competition mean that companies are limited in how much they charge their customers. They report price increases of just 0.7% in Q1 2019, significantly below the pace of input price inflation and total wage growth (both 2.2%). All of the above are putting pressure on profits growth, which is markedly down, from 3.1% 12 months ago to just 0.8% in Q1 2019. 

Prospects for the next 12 months

Businesses expect the pace of exports and domestic sales growth to increase, to 3.3% and 4.5% respectively. This will help support profit growth which businesses expect to improve to 4.8% year on year in the next 12 months. However, despite this, companies are planning to moderate the increases across all forms of investment, in line with weak confidence and reflecting their uncertainty over the longer-term outlook. Notably, capital investment growth is expected to see the biggest slowdown, from 3.0% this year to a mere 0.8% in the next 12 months.