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Economic Insight

ICAEW Business Confidence Monitor (BCM): East of England

Business Confidence Index falls sharply

The latest Business Confidence Monitor (BCM) shows business confidence falling further. Difficult economic conditions continue, though there has been some easing in the political turmoil of the previous period, which seriously unsettled financial markets. As a result, some economic stability has been restored, even though September’s events have resulted in higher interest rates, taxes and government borrowing, and lower government spending. But the global economic background continues to look very challenging.

The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period 17 October to 16 December 2022.

  • The East of England’s Business Confidence Index has weakened further in the latest survey period and is now at its lowest recorded level since early 2019.
  • Both domestic sales and export growth are broadly in line with the UK average. However, growth expectations for both types of sales are among the weakest across the UK.
  • The availability of non-management skills continues to be the most widespread growing challenge. Staff turnover has eased but remains an elevated problem.
  • Salaries are rising at a near-record rate, with a further increase planned for the year ahead.
  • Ongoing supply-side problems and elevated commodity prices mean that input price inflation is running at its highest rate since the survey began. Only a very slight moderation is forecast for the next 12 months.
  • Reflecting the decline in business sentiment, growth in both capital investment and Research & Development (R&D) budgets is expected to slow, particularly the former.

Business confidence in the East of England

The Business Confidence Index for the East of England has fallen for the sixth successive quarter and now stands at -24.0 in the latest survey period. This is the lowest index reading since the first quarter of 2019.

Domestic sales and exports growth

Domestic sales growth is broadly in line with the UK average, with an annual rise of 5.7% in the latest survey period. However, companies anticipate a marked slowdown in domestic sales growth over the next 12 months. The expected increase of 3.4% is the weakest growth outlook across the UK. A very similar pattern is apparent for export growth. A rise of 3.6% in the latest 12 months is a similar outturn to the UK-wide average. This rate of growth also marks a return to pre-pandemic norms, with the depreciation of sterling over the last 12 months probably boosting the competitive position of companies that sell into international markets. That said, export growth is expected to slow to 3.0% in the year ahead, meaning only businesses in the West Midlands have weaker expectations.

Business challenges

The weakening of the Business Confidence Index is probably linked to the range of issues companies currently face. The availability of non-management skills continues to be the most widespread growing challenge in the region. Indeed, 45% of companies cite this in the current period, the second highest proportion across the UK, behind only Yorkshire & Humberside. A combination of workers departing the labour market during the pandemic and Brexit induced restrictions on the movement and hiring of EU workers may be factors behind this. Staff turnover is less widely reported as a growing source of difficulty in the latest survey, but still remains elevated when compared to historical norms. The percentage of companies being challenged by this is 31%, almost double the region’s historical average.

Labour market

Against a backdrop of ongoing labour market challenges and very high inflation, average total salaries are rising at the sharpest rate (4.3%) since Q2 2007, and also the fastest pace across all UK nations and regions. In the year ahead, companies plan to increase salaries at a similar pace of 4.0%, suggesting that they do not expect current recruitment difficulties and inflationary pressures to quickly dissipate.

Employment growth in the East of England compares unfavourably with the UK average, rising by 2.8% in the latest survey period. However, businesses do expect a faster rise in their headcounts over the next year. The anticipated increase of 3.4% is the strongest outlook across the UK.

Input and selling prices, and profits growth

Ongoing supply-side disruptions and elevated energy prices continue to exert significant cost pressures on businesses. Annual input price inflation of 5.6% is the highest rate seen in the region since the survey began. A similar increase (5.3%) is expected in the 12 months ahead. In turn, companies are trying to offset these by lifting their selling prices by a record rate (3.7%), although this rise is expected to ease to 2.6% in the year ahead.

Sharp rises in selling prices have allowed profit growth to remain positive at 4.5%, just above the national average. However, a much softer increase is forecast over the next 12 months. At 2.8%, the East of England’s expected profit growth is the slowest of any UK nation or region. 

Investment

Reflecting the rises in sales and profits, investment spending has been strong over the past year. Annual capital investment growth stands at 4.1%, the fastest pace in the UK. Plans for capital spending over the next 12 months are far more modest, with an expected rise of just 0.8%. 

A similar story is apparent for R&D budgets. Annual growth of 2.7% is well above the UK average. However, slower growth of 1.5% is predicted for the year ahead, although this is still above the UK-wide outlook. The more modest plans for investment growth over the next year are concerning, given the importance of both capital spending and R&D budgets on improving productivity and, thus, competitiveness in both domestic and international markets.