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ICAEW Business Confidence Monitor (BCM): East of England

Q3 2021: Business Confidence Index reaches historic high in East of England.

  • After a challenging year, businesses expect a marked pick-up in both domestic sales and exports growth. Although growth in the former will slightly trail the UK average. 
  • Job losses have been limited over the past year due to the furlough scheme. And in the year ahead, employment should rise considerably.
  • Related to that, salary rises are expected to return to more familiar pre-pandemic rates, while businesses are becoming increasingly concerned by staff turnover and the availability of non-management skills. 
  • Regulatory requirements and transport problems are also becoming more prominent challenges.
  • Both input and selling prices are expected to rise over the next 12 months, after being very muted during the pandemic.
  • Against a backdrop of rising demand, growth in capital investment spending should improve. Emerging capacity constraints will be a driving factor here..

Business confidence in the East of England has risen to +40.1 in Q3 2021, the highest level seen in the region since the survey began, although slightly below the UK average. The swift distribution of vaccines and the gradual easing of coronavirus restrictions have helped lift business confidence.

Domestic sales and exports growth, and customer demand as a growing challenge

Companies have faced difficulties over the past year, particularly within domestic markets. However, the year-on-year decline in Q3 2021 for domestic sales was only 0.5%. Exports saw a modest increase of 0.4% over the same period, probably helped by the region’s strengths in pharmaceuticals and IT & Communications. And the overall improvement in the Business Confidence Index reflects strong sales expectations for the year ahead. Domestic sales are projected to rise by 6.0%, while exports should be 4.4% higher over the next 12 months. It should be noted that domestic sales growth is set to be marginally slower than nationally, which may explain why overall confidence is slightly below the UK average.

As demand returns, the proportion of businesses citing customer demand as a growing challenge has eased considerably since the pandemic. 29% of companies report this in Q3 2021, nearly 20 percentage points lower than its pandemic peak in Q4 2020.

Labour market

Over the last year, job losses in the East of England have been limited. This largely relates to the role of the government’s Coronavirus Job Retention Scheme in providing support to workers amid a collapse in demand. But as activity picks up, businesses are starting to hire again and expect staff levels to rise by 2.9% over the next 12 months. Strong employment growth should also facilitate faster growth in average total salaries. These are forecast to rise by 1.9% over the next year, which should mark a return to pre-pandemic rates.

Business challenges 

The rebound in activity has also revealed some concerns within the labour market, particularly over recruitment and skill availability. Indeed, the proportions of businesses citing concerns over staff turnover (23%) and the availability of non-management skills (17%) are now much more widespread than during the pandemic. 

Businesses also face a range of other challenges. Regulatory requirements stand as a growing issue for 39% of companies, making it the most widely reported growing challenge in the region. The main explanation for this is the impact of COVID restrictions on businesses. Brexit could also be another reason here, as some companies try and overcome short-term operational disruptions. Transport concerns also remain elevated when placed in the context of historical norms for the region. This too is pandemic-related: demand for space on vehicles and aircraft has increased sharply, but at the same time many transport staff have had to self isolate due to coronavirus. It is also possible that the structural transition towards online shopping and e-commerce has challenged some businesses as they try and adjust their delivery methods.

It is also striking that as demand picks up, marketplace competition concerns have risen in prominence. 32% of companies cite this issue in Q3 2021, the highest rate of incidence across the UK. 

Input and selling prices

A pick-up in input price inflation is also likely to be a concern for businesses. Over the last year, input costs increased by 1.3% and a further 1.6% increase is forecast for the year ahead. Supply chain disruptions and bottlenecks are likely to be factors driving this. However, these rates are in line with the increases seen in the immediate years before the pandemic. Similarly, the expected 1.2% rise in selling prices also appears to be a return to pre-pandemic rates. 

Investment and spare capacity

Businesses also plan to raise investment rates in the year ahead. After falling slightly over the past year, spending on capital assets should increase by 2.5%. This partly relates to a need to expand their capital stock. The proportion of businesses operating below capacity in the region has fallen to the joint lowest rate, along with London, across the UK. Longer-term supply-side constraints may be partly alleviated by a 1.9% rise in Research & Development budgets. This compares favourably to the muted 0.7% increase of the past year. And as employee numbers rise, staff development budgets should go up by 3.2%, which would be the fastest increase in the region for over a decade.