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Economic Insight

ICAEW Business Confidence Monitor (BCM): East of England

Business confidence eases once again as challenges build

Q2 2022: The latest Business Confidence Monitor (BCM) shows business sentiment weakening across most of the UK. As economic conditions tighten, businesses are facing significant challenges, particularly on the supply-side, that could hinder future growth. Input costs are increasing sharply, while salaries are rising in response to recruitment difficulties and labour shortages. This is despite companies experiencing strong sales growth as they continue to recover from the pandemic.

The results are based on telephone interviews with ICAEW Chartered Accountants that took place between 17 January and 21 April 2022.

  • The Business Confidence Index in East of England continues to trend downwards but remains in positive territory.
  • Domestic sales have increased sharply, while export growth has markedly improved as the global recovery from the pandemic continues. More growth is projected for both in the year ahead.
  • However, ongoing supply-side problems and higher commodity prices mean that input costs are increasing very sharply. As a result, businesses are raising their selling prices.
  • Companies are also facing higher wage bills, through both an increase in staff levels and faster pay growth.
  • Higher salaries are related to the widespread problems companies face with staff turnover and skill availability.
  • Despite these challenges, companies are increasing their investment spending and plan even faster rates of increase over the next 12 months.

Business confidence in East of England

The East of England’s Business Confidence Index now stands at +14.4 in Q2 2022, marginally below the UK average. This is the third quarter in a row in which confidence has weakened. The fact that the index is still in firmly positive territory is probably linked to the strength of sales growth over the last 12 months. However, the recent easing of the index from the heights of mid-2021 may partly reflect the ongoing challenges businesses face in terms of input prices and labour market frictions. 

Domestic sales and exports growth

Following declines through 2020 and early 2021, sales growth has markedly improved. Indeed, domestic sales increased by 5.8% in the year to Q2 2022. This is the fastest rate since Q3 2008. Business also expect domestic sales to strengthen in the 12 months ahead,. And after being particularly muted over recent quarters, exports expanded by 1.8% over the last year. While this does not yet mark a return to pre-pandemic norms, companies expect a much stronger outturn in the year ahead. 

Input, selling prices and profits growth

One factor weighing on business sentiment is persistently high input price inflation. Against a backdrop of ongoing supply-chain issues and heightened global commodity prices, input costs increased by 4.4% in the year to Q2 2022. This is expected to climb to 4.6% over the next 12 months. If this materialises, it will be the sharpest increase seen in the region since the survey began in 2004. It is also possible that Brexit-trade frictions have played a role, with businesses in the region among the UK’s most reliant on good imports from the EU.

Businesses are seeking to offset these cost pressures by increasing selling prices. After seeing limited gains during the pandemic, selling prices increased by 2.6%, year-on-year, in Q2 2022 and a very similar 2.5% rise is expected for next year. The outcome is that profits are still rising, by 6.3% over the last year. This is forecast to moderate very slightly over the coming 12 months. 

Labour market

Higher input costs are also being paralleled by rising labour costs. Firstly, annual employment growth in Q2 2022 of 3.2% comfortably outpaced the UK average. And businesses expect a further 2.6% increase in the year ahead. Secondly, average total salaries are rising (2.8%) and are set to increase at their fastest pace (3.5%) since late 2007 over the coming 12 months. 

Business challenges

The rise in salaries reflects labour market conditions. Staff turnover is an increasingly pressing issue for 38% of companies, while 34% feel that the availability of non-management skills is a growing source of difficulty. For staff turnover this is the highest rate seen in the region since the survey began in 2004. Both problems stem from recruitment difficulties as the strong upturn in demand creates labour supply bottlenecks. Post-Brexit limits placed on the movement and hiring of workers from the EU could also be part of the explanation. Linked to this, transport problems are a more pressing issue for 30% of businesses in Q2 2022. This is the joint highest rate (along with Q4 2021) for well over a decade.

Investment and spare capacity

Despite some clear challenges, businesses have increased their investment over the last year. Capital investment saw an annual increase of 2.6% in Q2 2022 and Research & Development (R&D) budgets increased by 1.7%. It is encouraging that companies plan stronger rises in the year ahead. Spending on capital assets is expected to rise by 2.7%, while companies plan to raise R&D budgets by 2.8%.