Q2 2022: The latest Business Confidence Monitor (BCM) shows business sentiment weakening across most of the UK. As economic conditions tighten, businesses are facing significant challenges, particularly on the supply-side, that could hinder future growth. Input costs are increasing sharply, while salaries are rising in response to recruitment difficulties and labour shortages. This is despite companies experiencing strong sales growth as they continue to recover from the pandemic.
The results are based on telephone interviews with ICAEW Chartered Accountants that took place between 17 January and 21 April 2022.
- The North West’s Business Confidence Index remains broadly in line with last quarter’s reading but is way below the record highs of mid-2021.
- Domestic sales increased sharply over the past 12 months. Export growth was more muted, although faster growth is projected in the year ahead.
- Companies are dealing with a number of supply-side issues. Skills availability, staff turnover and transport problems are all elevated compared with their historical averages.
- Input costs and labour costs are also rising at much faster rates than historically seen. Companies plan to offset this by increasing selling prices at a near-record rate over the next year.
- Despite these challenges investment spending is rising, particularly on capital assets. Mounting capacity constraints largely explain this.
Business confidence in North West
The North West’s Business Confidence Index remains broadly in line with last quarter’s reading, standing at +18.1. Nevertheless, this is a considerable way below the index’s peak in Q3 2021 of +42.9. This moderation is likely to stem from the range of challenges that business face, including higher cost pressures and issues with recruitment.
Domestic sales and exports growth
After declining during the pandemic, sales in the domestic market have improved as economic activity has recovered. Indeed, in the year to Q2 2022, domestic sales increased by 5.8%. This is only marginally below the record of 5.9% in Q1 2022. Companies also expect domestic sales growth to hold firm over the next year, with the same rate of increase projected as the past 12 months. Export performance has, however, been much more modest. In the year to Q2 2022, exports increased by just 0.9%. This is the slowest outturn across all of the UK. Businesses in the region are among the most reliant on the EU market for exporting goods so it is possible that Brexit-induced trade frictions could be hampering performance here. And while companies do expect growth to pick up in the coming 12 months, this rise would still trails behind the national outlook.
Companies are also dealing with a range of supply-side problems, particularly with respect to the labour market. In Q2 2022, 41% of businesses cite staff turnover as a growing issue, more than double the historical average for the region. The same is also true for the availability of non-management skills, with 34% of businesses being increasingly challenged in this area. For both problems, companies are clearly struggling to recruit as a result of labour supply bottlenecks due to a rise in demand for workers. Increased difficulties due to people exiting the labour market during the pandemic could also be a factor here. The same factors also help to explain why the availability of management skills is a growing challenge.
Transport problems also remain very high when compared to historical norms. In Q2 2022, 31% of companies are increasingly challenged in this area, almost twice the region’s historical average. Stronger demand conditions are likely to have put significant pressure on road freight capacity, with that issue likely to have been amplified by ongoing shortages of HGV drivers. New customs and border processes due to Brexit may also be adversely impacting companies that import and export in the region.
Labour costs are rising for businesses. Employee numbers are 2.5% higher than they were a year ago and are expected to rise at the stronger rate of 3.2% in the 12 months ahead. As well as this, growth in average total salaries is picking up. A rise of 2.8%, year-on-year, in Q2 2022 marks a return to pre-pandemic rates. And the 3.2% increase planned for the next year would be the sharpest outturn in the region since the third quarter of 2007. The rising challenges with recruitment and skill availability are likely to underpin the salary rises.
Input, selling prices and profits growth
Higher labour costs are also being paralleled by stronger input price inflation. Persistent supply-side frictions, transport constraints, and rises in fuel and material costs are all factors behind the 3.7% rise in input prices in the year to Q2 2022. This is the sharpest increase seen in the region in over a decade. Companies do not expect these cost pressures to ease over the next year, with annual input price inflation projected to reach 4.3%. If this were to materialise, in only one other quarter (Q4 2008) since the survey started in 2004 would input prices have risen at a faster pace.
Some of these higher costs will be passed onto customers, as businesses plan to increase selling prices by 3.3% in the year to Q2 2023. If achieved, this would be the joint fastest increase in the region (along with Q3 2005) since the survey began. The net effect of this is that businesses expect profits to continue rising strongly over the next 12 months.
Investment and spare capacity
Against a backdrop of higher sales and profits, companies are increasing their investment spending. After being subdued during the pandemic, spending on capital assets is up by 2.5% in the year to Q2 2022 and a very similar increase of 2.4% is planned for the 12 months ahead. Mounting capacity constraints are a factor behind this. The proportion of businesses operating below capacity (32%) is the lowest across all of the UK, meaning that many businesses now need to expand their capital stock in order to meet demand. By comparison, the expected growth in Research & Development (R&D) budgets in the year ahead is more modest (1.0%), following a rise of 1.6% in the year to Q2 2022.