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Economic Insight

ICAEW Business Confidence Monitor (BCM): North West

Q4 2022: Weak sales and rising costs are damaging business sentiment in the North West

The latest Business Confidence Monitor (BCM) shows business confidence falling further across the UK as difficult economic conditions combine with political turmoil. The latter has seriously unsettled financial markets, and although some stability has been restored, recent events are likely to result in higher interest rates, taxes and government borrowing, and lower government spending, than previously expected. This has adversely affected business sentiment.

The survey results are based on telephone interviews among ICAEW Chartered Accountants that took place between 25 July and 14 October 2022.

  • The Business Confidence Index for the North West has fallen further into negative territory and sits slightly below the UK average.
  • This partly reflects a poor sales outlook for the region, with exports forecast to increase at a slower rate than the national average and domestic sales growth expected to be the slowest across the country.
  • In addition, labour market challenges, including staff turnover and the availability of both management and non-management skills, are more widespread problems than at any time since the survey began.
  • As a result, businesses plan to increase salaries at the fastest rate in over 15 years. At the same time, employment growth has been modest.
  • In addition to rising labour costs, input price inflation is higher than at any time since the start of the survey. The result is that selling prices are rising at a record pace.
  • Reflecting the weakening of overall business confidence, capital investment plans are subdued, with growth set to slow considerably over the next year.

Business confidence in the North West

The Business Confidence Index for the North West has continued to decline from its peak in Q3 2021. It now stands at -17.4 in Q4 2022, which is slightly below the UK national figure of -16.9.

Domestic sales and exports growth

The weakening of sentiment is partly explained by poor domestic sales performance over the past 12 months. These expanded by just 4.1%, the slowest rate across the UK. An even slower increase of 3.1% is forecast over the year ahead, which means businesses in the region also have the weakest outlook across the UK. In contrast, exports grew 4.3%, outpacing the national average and making the North West the only region in which exports grew faster than domestic sales. However, businesses expect a smaller increase, of only 3.7%, in the year to Q4 2023.

Business challenges

Business confidence is also being damaged by continuing supply-side challenges, especially with regard to the labour market. Staff turnover is the most prominent growing challenge in the region, with 44% of companies citing the issue, making it more widespread than at any time since the survey began in 2004. Businesses in the North West also face record problems with both management and non-management skills, with 33% and 42% experiencing growing difficulties, respectively. Part of the explanation for these elevated rates is the departure of workers from the labour market during the pandemic. Restrictions on the movement and hiring of workers from the EU following Brexit could also be a factor here.

Challenges are not just confined to the labour market. Regulatory requirements remain a widespread difficulty, with 37% of companies experiencing problems. Only those in London and the West Midlands report more widespread difficulties with regulatory requirements. Reflecting the weakening sales outlook, customer demand is also a prominent issue, with 34% of companies viewing this as a growing source of difficulty. Meanwhile, the proportion of companies reporting late payments has surged to 25% in Q4 2022, with a higher level only found in Scotland and Yorkshire & Humber. Clearly, the more difficult financial conditions faced by both businesses and consumers are a factor behind this.

Labour market

Against a backdrop of labour market tightness, businesses are facing rising labour costs. Average total salaries increased 3.2% in the year to Q4 2022, the joint fastest rate in the region, along with the previous quarter, in more than a decade. Businesses are also planning a sharper rise of 3.8% over the coming year which, if achieved, would be the joint fastest increase since Q4 2004. Clearly, businesses expect the current difficulties to persist in the year ahead.

Challenges with recruitment, along with slowing domestic sales growth, help to explain why employment growth is below the UK average. Businesses are increasing staff levels by 2.2%, year-on-year, in Q4 2022, with a slightly weaker rise of 1.9% planned over the next 12 months.  

Input and selling prices, and profits growth

As well as rising labour costs, input prices are rising sharply as supply-chain disruptions persist and global energy prices remain elevated. Input price inflation reached 6.0% for the 12 months to Q4 2022. This is the highest level since the start of the survey, and only businesses in Yorkshire & Humber experienced a faster rise in input prices. A further 5.4% increase is expected in the year ahead.

However, businesses are passing on some of the cost burden to customers, with selling prices 4.2% higher than a year ago. This is the fastest increase since the survey began, and higher than in any other nation or region. Businesses plan a further 3.4% rise over the next 12 months, which would be broadly in line with the national average (3.3%).

In terms of profits, it appears that annual growth peaked in the previous quarter and is now starting to ease. Businesses report a 3.6% rise in profits in Q4 2022. However, they do anticipate a more marked slowdown to just 1.7% over the next 12 months, as cost pressures hold firm but sales growth softens.

Investment

Encouragingly, despite all of these challenges, businesses have increased their investment spending in the year to Q4 2022. Capital investment rose 3.7%, with only the West Midlands reporting faster growth. Unfortunately, spending on capital investment is expected to rise at the significantly slower rate of 1.4% in the 12 months ahead. In contrast, companies plan to increase Research & Development (R&D) budgets by a faster rate of 2.4% over the next year, compared with an increase of 1.8% currently.