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ICAEW Business Confidence Monitor (BCM): London

Q3 2021: Strong sales outlook helps lift business confidence to record high.

  • After a challenging past year, London businesses expect sales to improve markedly in the year ahead.
  • As demand improves companies plan to increase their employment levels at the second fastest rate across the UK, behind the South West. 
  • Salary growth is also forecast to outpace all other parts of the UK over the next 12 months.
  • As well as rising labour costs, input price inflation is creeping up. In response, businesses plan a moderate increase in selling prices.
  • Investment plans have also been upgraded for the year ahead. This is particularly the case for capital equipment, as businesses address capacity constraints and the surge in demand. 

In Q3 2021, London’s Business Confidence Index has risen to its highest ever level since the survey began in 2004. At +52.3, only businesses in one region, the West Midlands, are more optimistic. Business sentiment is no doubt being buoyed by the gradual reopening of the UK economy. This, in turn, has driven expectations of strong growth in sales as pent-up demand is released. 

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

The past year has been challenging for businesses in London and domestic sales are still 0.6% below their level of a year ago. Export performance has fared slightly better. In the year to Q3 2021, these are up by 1.4%, compared to no level change at the national level. The resilience of the capital’s globally-important IT & Communications, Business Services and Banking, Finance & Insurance sectors is probably a major factor supporting international sales performance. Nevertheless, overall growth is still very weak when placed in the context of historical performance. 

In contrast, domestic sales are projected to rise by 7.3% over the next year, which, if achieved, would be the fastest rate of growth since mid-2008. Export growth should also markedly improve, with a year-on-year rise of 5.1% expected. Only the East Midlands and South West have stronger outlooks in this area. 

Associated with this sales outlook, customer demand has become a less pressing issue for companies. In Q3 2021, 33% of businesses cite this as a concern, in comparison to a pandemic peak of 56% in Q1 2021. 

Labour market

Over the last 12 months job losses in the capital have been limited. This partly reflects the role of the government’s Coronavirus Job Retention Scheme in cushioning the impact of falling activity on the labour market. The recent surge in activity as the UK reopens means that employment levels are now 0.5% higher than a year ago. And as the economic recovery gains further momentum, businesses intend to start hiring at a faster rate. Over the coming year, employee numbers are projected to rise by 3.6%, the second strongest outlook across the UK, behind the South West. This also helps to explain why average total salaries are expected to increase at a sharper rate (2.7%) than elsewhere in the UK.

Business challenges 

A pick-up in wage costs is consistent with increasing proportions of businesses reporting staff turnover and the availability of non-management skills as growing issues. In Q3 2021, 20% cited the former and 18% the latter, both markedly higher than in any quarter during the pandemic. Companies also report a range of other difficulties, particularly with regulatory requirements which is the most widely reported growing challenge (38%) for businesses. COVID restrictions are probably the main factor behind this, although challenges in adjusting business operations to the post-Brexit trading environment could also be a factor. The recent Memorandum of Understanding between the UK and EU provides some temporary reassurance for the financial sector.

Selling and input prices, profits growth

Higher labour costs are also being paralleled by faster input price inflation in the capital. The surge in demand over recent months means that input prices saw an overall increase of 1.5% in the past year. And a further pick-up of 1.9% is expected in the year ahead. To help offset this, selling prices are expected to increase, albeit at the modest rate of 1.1%. This contrasts with the past year, when selling prices saw barely any gains. Nevertheless, weak price-cost dynamics have not hampered profit growth projections. These are forecast to increase by 7.9%, which would be the strongest expansion since late-2007.

Investment and spare capacity

As companies now expect strong growth in sales and profits, investment plans have been upgraded in the capital. Research & Development budgets are set to rise by 1.6% in the year to Q3 2022, after being restricted during the pandemic. The expected rise in headcounts should also lead to staff development budgets increasing by 2.6%, following a contraction over the last 12 months. However, spending growth will be fastest for capital investment, at 3.3%; this partly stems from the need for businesses to expand their capital stock as demand surges, with the percentage of companies operating below capacity in London now the joint lowest across the UK.