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Q1 2022: Business confidence is still high despite labour market challenges.

  • Despite falling for the second successive quarter, the Business Confidence Index is the joint highest across the UK, alongside the West Midlands.
  • Sales have expanded sharply over the past year, particularly for exports. Growth is expected to improve further.
  • The sales outlook also helps to explain why businesses plan to increase employment at its fastest rate in just over 14 years.
  • However, businesses are being increasingly challenged by frictions in the labour market, with staff turnover and the availability of skills major sources of difficulty.
  • Uncertainty over COVID-19 restrictions and regulations related to recruitment post-Brexit may help to explain why regulatory requirements are also a widespread concern.
  • Profits are rising and companies also intend to increase capital investment over the year ahead, reflecting an improving demand situation.

In Q1 2022, London’s Business Confidence Index remains above the capital’s historical average, at +35.8, placing London equal with the West Midlands as the joint most confident part of the UK. However, the index has fallen over the last two quarters, possibly due to growing challenges within the labour market.

Domestic sales and exports growth

After experiencing declines at the height of the pandemic, London businesses have seen sales performance markedly improve during the recovery phase. Domestic sales increased by 4.8%, year-on-year, in Q1 2022, comfortably above their historical average. Companies will also be deriving confidence from a 3.3% rise in exports over the same period. This means exports in London experienced the joint second highest rise, behind Yorkshire & Humberside and alongside Wales. Over the next 12 months, businesses expect growth in domestic sales (5.6%) and exports (4.2%) to strengthen further.

Labour market

The rise in sales over the past 12 months underpins a 2.9% rise in employment over the same period. And businesses anticipate a further 3.9% increase in the 12 months ahead. If achieved, this will be the fastest rate of growth in London for over 14 years. Alongside that, average total salaries increased by 2.0% over the past year, with a further 3.1% rise expected over the next 12 months. This is the joint strongest outlook across the UK, along with the East Midlands.

Business challenges

The increase in wages partly reflects challenges that businesses are facing in the labour market. Staff turnover is a growing source of difficulty for 41% of businesses. Adding to that, higher proportions of businesses are being increasingly challenged by the availability of management skills and non-management skills (21% and 36% respectively). All three issues are now more widespread in London than at any point since the survey began in 2004.

Regulatory requirements are another very prominent issue, with 39% of businesses being increasingly challenged in this area. Regulatory requirements are always prominent in financial services, a sector that has a large presence in London. Uncertainty over further COVID-19 restrictions being imposed during the quarter may also be part of the explanation, as well as difficulties with employing non UK-resident staff as a result of Brexit. Delays at ports due to Brexit may also help to explain why transport problems are a growing problem for 30% of businesses, well above the historical norms for London.

Selling and input prices, profits growth

Input costs are also rising for businesses, with an increase of 3.0% in the year to Q1 2022. A similar increase of 2.9% is projected over the next 12 months, as companies anticipate further increases in demand but also ongoing supply-side disruptions. In turn, companies have increased selling prices by 1.5% over the past year and plan a slightly stronger 1.7% rise in the year ahead. These price-cost dynamics, combined with higher sales, mean profits have increased by 5.4% over the past year. Similar growth is also expected in the upcoming year.

Investment and spare capacity

Against a backdrop of higher sales and profits, businesses have increased capital spending by 2.3%, year-on-year, in Q1 2022, signalling a return to pre-pandemic investment rates. Businesses plan a further rise over the next 12 months of 2.1%. They also intend to upgrade their Research & Development (R&D) budgets; a 2.4% increase is expected in the year to Q1 2023, a stronger growth outlook than nationally.