ICAEW Business Confidence Monitor (BCM): East Midlands
Q2 2019: Business confidence hit by weak profits growth as well as broader Brexit concerns
Confidence for the East Midlands remains in negative territory. Increased stockpiling by companies in the region suggests that Brexit is at the forefront of business concerns. As well as this, companies report no marked improvement in sales growth and a slowdown in profits growth, with the latter likely reflecting rising costs. Against that backdrop, investment rates are subdued, and businesses expect further moderation's to their spending in the year ahead.
Business confidence trend in East Midlands
Business confidence in the East Midlands stands at -13.1 in Q2 2019. Slowing global trade is likely to be adversely impacting the region’s relatively large manufacturing sector, while ongoing uncertainty surrounding the Brexit negotiations may also be dampening company sentiment. Businesses in the region, particularly manufacturers, look to be taking precautionary Brexit measures, with the proportion of companies reporting above normal stock levels which are higher than the national average.
Exports, domestic sales and sales volume
Businesses in the region report similar rates of sales growth to a year ago. Domestic sales are rising by 3.4%, broadly unchanged from last year. Exports growth is marginally faster than a year ago, increasing by 3.9% in the past 12 months.
Costs and profits
Business confidence may also be suffering from weaker profits growth, falling from 2.5% in Q2 2018 to just 1.7% in Q2 2019, the weakest rate across all of the UK. This slowing is likely to reflect the fact that input price inflation (3.1%) in the region is among the highest in the UK, possibly related to some recovery in raw material prices for food manufacturers.
And with sluggish market conditions apparent, a fifth of businesses now report late payments as a growing issue. Moreover, regulatory requirements remain the most widely reported growing concern in the East Midlands, with 54% of companies citing increasing difficulties over these in the year to Q2 2019.
Given these developments, investment growth is somewhat subdued. Rises in staff development budgets (1.0%) and capital investment (1.6%) are both slower than a year ago. And while Research & Development (R&D) spending is increasing at a faster rate (2.2%) when compared to other forms of expenditure, this is still below the UK average of 2.7%.
Prospects for the next 12 months
Over the next year, businesses expect faster domestic sales and profits growth, of 4.5% and 5.2% year-on-year, respectively. In terms of exports, businesses anticipate a similar expansion to the past year. However, they intend to further moderate investment spending, with capital investment and R&D budget growth both set to slow. This may reflect the overall weakness in confidence plus the increasing proportion of companies that are operating below capacity (66%). The latter impacts how much additional investment businesses need to undertake, to meet demand.