ICAEW Business Confidence Monitor (BCM): East of England
Q2 2021: Confidence Index rises as businesses expect sharp sales rebound
- Domestic sales fell significantly over the past 12 months, and so too did profits, although an easing of input price inflation probably prevented an even deeper contraction.
- Many businesses will have also derived some benefit from an increase in exports over the last year.
- Businesses have cut their staff levels, but only marginally, with the government’s furlough scheme helping to limit job losses.
- Against this backdrop, customer demand and regulatory requirements are widespread concerns. Transport problems have also risen in prominence, as businesses contend with COVID-19 and Brexit difficulties.
- Yet the East of England’s Business Confidence Index has risen dramatically. This is clearly driven by expectations of an upturn in activity as the UK leaves lockdown. Sales and profits are both projected to rebound strongly.
- In response, businesses expect to increase employment, while investment rates are also projected to improve.
Business confidence in the East of England has climbed to its highest level in nearly seven years in Q2 2021, at +32.2. This probably reflects the fast distribution of vaccines across the UK and the resulting decline in infection rates, and expectations of a strong recovery in economic activity in 2021 and into 2022.
Domestic sales and exports growth
Companies have faced significant challenges over the last year, particularly in domestic markets. Domestic sales are 3.4% lower than their level from a year ago, the steepest contraction seen in the region since records began. That said, some companies will have benefited from export growth, which has been the strongest across all of the UK, at 1.0%. The region’s strength in pharmaceuticals and IT & Communications are possible factors here, with both sectors experiencing rising demand during the pandemic.
Profits growth and input costs
The weakness in domestic sales has fed through to profits. These are 2.4% below their level from a year ago. However, the fall in profits would probably have been steeper if not for an easing of input price inflation to just 0.2% in Q2 2021. This is the slowest rate across all of the UK.
Companies have also seen labour costs fall over the last year. They have cut average total salaries by 0.6% in Q2 2021, the second sharpest reduction across the UK behind the East Midlands. Furthermore, employee numbers are down from a year ago, albeit by only 0.2%. The modest fall in employment, when compared to the large declines in domestic sales, reflects the impact of the government’s Coronavirus Job Retention Scheme in allowing businesses to retain workers amid the collapse in demand.
As companies have contended with falling domestic sales and profits, investment rates have been moderated significantly. Businesses have lowered their capital investment spending by 2.0% over the last year, the sharpest contraction in the region since the second quarter of 2004 and also the weakest rate across the UK in the year to Q2 2021. And while Research & Development (R&D) budgets are up slightly from a year ago (0.5%) this is the slowest growth in over a decade.
Although business confidence has improved, conditions remain uncertain and there are a number of challenges for companies. Customer demand is the most widely reported growing challenge: 44% of companies cite this in Q2 2021, compared to 35% in the survey period before the pandemic hit. 37% of companies also report regulatory requirements as a pressing issue, making it the second most widespread growing challenge in the region. An obvious explanation for both is the impact of COVID-19 restrictions on businesses. Brexit could also be another reason here, with some companies likely to be experiencing short-term operational disruptions as they adjust to new regulatory processes with the EU.
Transport problems have also surged as a growing issue over the past year—probably for the same reasons. Indeed, 27% of companies report this issue as a source of increasing difficulty, comparing unfavourably to a rate of just 8.0% in the year to Q2 2020. It is also possible that structural shifts towards online shopping and e-commerce during the pandemic have caused some problems for businesses as they try to adjust their delivery services in order to meet demand.
Prospects for the next 12 months
The region’s Business Confidence Index has risen sharply, with companies moving on from the challenges of the past year and feeling optimistic about future business conditions. This is underpinned by expectations of rebounds in domestic sales and exports growth of 6.4% and 3.5% in the year ahead. In consequence, businesses expect to increase their headcounts by 1.7%, and also anticipate a year-on-year rise in profits of 7.4%. Further still, they plan to increase both capital investment and R&D budgets over the next year, the former by 3.2% and the latter by 2.5%.