ICAEW Business Confidence Monitor (BCM): East Midlands
Q3 2021: Confidence reaches record level, underpinned by strong sales outlook.
- Following a tough past year, domestic sales are expected to rise at a faster rate than elsewhere in the UK. Export growth will also be among the strongest across the UK regions, as business confidence reaches its highest ever level in the region.
- As the economy expands, the proportions of businesses citing skills availability and staff turnover as growing challenges have risen sharply.
- Businesses expect to increase their headcounts and salary growth also looks set to pick up.
- Businesses expect to see further increases in input costs, although at rates not markedly different from pre-pandemic norms.
- Beyond labour market challenges, regulatory requirements and transport problems are other prominent sources of difficulty.
- Spending on capital assets and Research & Development are expected to increase, after declining during the pandemic.
The Business Confidence Index for the East Midlands stands at its highest ever level in Q3 2021 since the survey began in 2004, at +50.2. This places the region among the more optimistic parts of the UK. Underpinning this improvement in sentiment is the expectation of a sharp rebound in economic activity as business conditions normalise in the wake of the pandemic.
Exports and domestic sales growth, and customer demand as a challenge
In the early stages of the pandemic, businesses in the region suffered sharp declines in sales. And despite some subsequent recovery, domestic sales are still 1.9% lower than a year earlier: the sharpest contraction across the UK. And given the region’s reliance on exports, it is also concerning that exports declined by 2.6% over the past year. Only businesses in Yorkshire & Humber have seen a deeper fall in this regard. The weakness in international sales can be partly explained by the region’s reliance on vehicle exports and civilian aero-engine sales, two sub-sectors of manufacturing that have been particularly damaged by coronavirus containment measures across the world.
The overall improvement in business confidence stems from the sales outlook for the coming 12 months, with businesses anticipating a strong rebound in growth as pent-up demand is released. Indeed, domestic sales are projected to rise by 9.1% year-on-year, the strongest forecast across all UK regions. And expected growth of 5.2% for exports is surpassed only by companies in the South West.
Associated with this, the proportion of businesses citing customer demand as a growing challenge has eased considerably from its pandemic peak of 56% in Q1 2021 to 42% in Q3 2021.
As the sales recovery gathers momentum, businesses plan to start hiring again. Over the past year employment was cut by 1.0%, although job losses would probably have been more severe if not for the government’s Coronavirus Job Retention Scheme. But looking ahead, companies intend to raise their headcounts by 2.0%. Higher employment levels also help to explain why average total salaries are expected to pick up by 2.1% after remaining unchanged over the last 12 months.
Businesses continue to report a range of growing challenges. Another likely reason for the expected upturn in salary growth is growing concern over skill availability. The percentage of businesses reporting the availability of non-management skills as a more pressing issue (23%) has risen sharply when compared to recent quarters and is now above the rate of incidence seen nationally. Staff turnover has also become a much more widespread growing challenge. 28% of companies cite this in Q3 2021, five percentage points higher than the UK average.
Beyond labour market challenges, the proportion of businesses reporting regulatory requirements as an increasing source of difficulty has trended upwards over recent quarters, and now stands at 42%. This is likely to reflect difficulties that many businesses have had in adapting to COVID-related restrictions, with production lines in the region disrupted by self-isolation requirements. In addition, new customs regulations and other changes following Brexit could be hampering the operations of some exporting businesses in the region.
Also creating challenges for businesses in the East Midlands are transport problems. The proportion of businesses reporting this as a growing issue (27%) is well above the historical average for the region (14%). As economic activity is recovering, businesses require more space on delivery vehicles and aircraft, but are facing supply shortages, some of them due to difficulties in recruiting HGV drivers for delivering goods. Brexit-related disruptions may also be complicating matters.
Input and selling prices
Supply disruptions and bottlenecks are helping to drive a pick-up in input price inflation with costs rising by 1.8% over the past year. And businesses expect a further rise of 2.1% in the 12 months ahead: a return to pre-pandemic norms. And after seeing barely any gains during the pandemic, businesses also plan a sharper increase in their selling prices (1.4%) in the year to Q3 2022. Again, that is a return to pre-pandemic rates.
Against a backdrop of declining sales and mounting challenges, businesses restricted their investment spending over the past year. Capital investment and Research & Development (R&D) declined by 0.7% and 1.1%, respectively. However, with the region’s economy expected to expand rapidly, investment rates are also forecast to markedly improve. Spending on capital assets is projected to increase by 2.6%, and Research & Development budgets should rise by 2.3%, which is encouraging given its importance for competitiveness. Staff development budgets are also set to rise broadly in line with increases in employee numbers over the year ahead.