ICAEW Business Confidence Monitor (BCM): North West
Q1 2021: Following a challenging a year, companies are optimistic for 2021
- Domestic sales have contracted over the last year, while exports have risen slightly, although this may have been distorted by Brexit-related activity in Q4 2020.
- The majority of companies are operating below capacity, and unsurprisingly, customer demand is the most widely cited growing challenge for businesses.
- The ability to expand into new areas has also surged as a growing issue, possibly relating to concerns about post-Brexit trade frictions.
- Weakness in demand has restricted selling price increases which, along with falling domestic sales, have pushed down profits. However, this decline would have been steeper if not for a fall in costs.
- However, business confidence has moved sharply into positive territory, lifted by the news of vaccine approval, with companies expecting a strong recovery in sales during 2021, especially in domestic markets. They anticipate this will lead to a rebound in profits, higher employment and an increase in investment spending.
The North West’s Business Confidence Index stands at +11.4 in Q1 2021, a significant improvement from the previous quarter. Positive news regarding vaccine approvals and distribution, and consequent expectations of a rise in activity and sales in 2021, have clearly helped to lift sentiment following an extremely challenging year.
Domestic sales and exports growth and spare capacity
Over the year to Q1 2021, businesses suffered a contraction in domestic sales of 1.8%, similar to the rates seen in the region during the global financial crisis.
The situation for exports is slightly different, in that companies report an expansion of 0.6% over the last 12 months. However, this figure probably masks the difficulties of the past year. During much of 2020 exports probably fell as global demand collapsed, although this is likely to have been balanced at the end of the year by customers bringing forward orders, to avoid possible disruptions at the end of the UK-EU transition period.
In conjunction with the weakness in sales performance, 55% of businesses are operating below capacity in Q1 2021, comparing unfavourably to the 39% reported in the first quarter of 2020.
Against a backdrop of falling domestic sales and widespread spare capacity, 47% of companies report customer demand as a growing concern in Q1 2021, making it by far the most widely cited increasing challenge in the region.
As well as demand challenges, there is rising concern among companies about their ability to expand into new areas. Nearly a quarter of businesses report this as a growing issue in Q1 2021, the highest rate seen in the region for 13 years. Clearly, the introduction of domestic and global travel restrictions will have hurt the ability of companies to enter new markets. And concerns over market access have possibly been heightened by worries over post-Brexit trade frictions.
Selling prices, profits growth and late payments as a growing challenge
Given the weakness in sales, companies have understandably restricted their selling price increases to just 0.3% over the past 12 months, the joint smallest since the end of 2015. This, when coupled with declining domestic sales, has put severe pressure on company margins, with profits 3.2% below their level in the year before. The difficult financial environment is reflected in 23% of companies citing late payments as a rising source of difficulty, up from a year ago.
Labour costs and input prices
The contraction in profits would probably have been even deeper if not for a fall in costs for businesses. In response to the declines in domestic sales, companies have reduced their employment levels (-0.9%) at a faster rate than in any period since Q4 2012. Coupled with this, businesses have cut average total salaries, albeit marginally by 0.2%, for the first time in over a decade. Input price inflation has also eased to 0.7% in Q1 2021, a notably slower pace than the 2.0% reported in the year before.
Investment growth and plans
The weakness in profits, together with the huge degree of uncertainty that businesses have faced during the crisis, helps to explain why investment rates are weak by the historical norms of the region. Indeed, companies have cut capital investment (-0.5%) for the first time since the end of 2010. And related to the fall in employee numbers, staff development budgets are slightly below their level from a year ago.
However, growth in both capital investment and staff development budgets are projected to return to positive territory (both at 1.9%) in the year ahead. And following a modest rise in Research & Development (R&D) budgets of 0.8% year-on-year in Q1 2021, companies plan to increase spending here at the faster pace of 1.4% in the coming 12 months.
Prospects for the next 12 months
Reflecting the improvement in confidence, companies anticipate a strong rebound in performance during 2021. An important factor here is likely to be the expectation that the roll-out of coronavirus vaccines will enable a return to normal business and social behaviour, both domestically and internationally. Businesses forecast that domestic sales and exports will rise by 5.8% and 3.4% respectively in the year to Q1 2022. Profits are also expected to increase by 5.5%. And this outlook is set to support an expansion in employment of 1.9%, the joint strongest outlook, along with Scotland.