ICAEW Business Confidence Monitor (BCM): London
Q3 2019: Slowing sales and profits growth weighing heavily on company confidence
Business confidence in London remains in negative territory in Q3 2019. As well as Brexit concerns, companies report slowing sales and profits growth. Given these difficult market conditions, businesses cite demand factors as pressing issues, and are planning to moderate all forms of investment growth.
Business confidence in London
The Business Confidence Index in London stands at -16.6 in Q3 2019, below the UK average of -10.3. The weakness in overall sentiment may partially stem from difficulties in the real estate market. Wider concerns over Brexit and the global economy are impacting London’s globally prominent financial sector, as well as some of the city’s internationally-traded business services.
Domestic sales and exports
Ongoing difficulties in terms of sales may also be hampering overall business confidence. Domestic sales growth has slowed to 2.5% year-on-year now from 2.9% at this time last year, marking the seventh consecutive quarter below the UK average for London. Slower rises in exports could also be a reason for weak confidence. Export growth has displayed an overall downward trend in recent quarters and currently stands at 2.3%, comparing unfavourably with an expansion of 3.6% in the year to Q3 2018.
Selling and input prices, and profits
Companies in London are struggling to achieve any substantial increases in selling prices, with a rise of just 0.6% year-on-year in Q3 2019. This may be partially explained by weaker sales growth, which is likely to be making companies reluctant to significantly increase the prices they charge to their customers. Selling prices also continue to trail behind input price inflation (2.2%) and total wage growth (1.8%). Given these developments, annual profits growth is down from 4.2% a year ago to 2.4% in Q3 2019.
Against that backdrop, companies are reporting growing concerns over demand factors. A higher proportion of companies are citing customer demand (38%) and competition in the marketplace (41%) than a year ago. There are also pressing labour market issues. The availability of both non-management and management skills are growing sources of difficulty for 22% and 18% of London companies, respectively, compared to 13% and 10% a year ago.
The weakness in business confidence, combined with slower profit growth, is also revealing itself through the investment rates of companies in London. Rises across all forms of investment expenditure are below their respective UK averages. Companies are increasing capital investment by the more modest rate of 1.5% in Q3 2019 year-on-year, compared to 2.0% in the year to Q3 2018.
Prospects for the next 12 months
Businesses expect slight improvements in exports (2.8%) and domestic sales (2.9%) growth over the coming 12 months, although they are set to remain low by historical standards for the region. Similarly, profits are also projected to rise at a faster rate than this year, at 3.4%.
However, businesses plan to restrict growth further across all forms of investment spending in the next year. Research & Development budgets are expected to rise by 1.0%, in comparison to 2.0% over the past year. And following a moderate increase over the past year, capital investment growth is projected to slow further still, to just 0.7% in the next 12 months.