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ICAEW Business Confidence Monitor (BCM): North West

Q3 2021: Business confidence improves but labour market concerns are rising.

  • The North West’s Business Confidence Index has climbed to its highest ever level in Q3 2021, although it slightly trails the UK average.
  • Sales projections are strong, but also slightly below the national figures.
  • Businesses also anticipate faster rises in input costs than elsewhere in the UK. Some of this will be passed on through selling price rises.
  • Labour costs are also expected to rise both through higher employment levels and a pick-up in salaries.
  • The rise in salaries relates to more widespread concerns over staff turnover and the availability of non-management skills.
  • More encouraging are the planned improvements in investment rates. Across all forms, spending on capital investment is set to grow the fastest over the next 12 months.

The North West’s Business Confidence Index has risen to its highest level since the survey began in 2004, standing at +42.9 in Q3 2021. As elsewhere, sentiment is likely to have been buoyed by the gradual retraction of COVID containment measures and rising demand for goods and services. Businesses in the region are nevertheless slightly less optimistic than across the UK as a whole.

Domestic sales and exports growth

The past 12 months have clearly been challenging for businesses in the region. However, companies have seen modest expansions in domestic sales and exports of 0.8% and 0.6%, respectively. The weakness in sales performance during the first lockdown has been more than offset by the recovery in activity in the second half of 2020 and the first half of this year, as restrictive measures have been eased and companies have adapted. Businesses expect a much stronger trend in the 12 months ahead as pent-up demand is released. Domestic sales are projected to be 7.1% higher than their level in the current quarter, while exports are forecast to rise by 2.8%. But both these projections trail their respective national outlooks, which largely explains why the region’s overall confidence index is below the UK average.

Input and selling prices, and profits growth

As the regional economy recovers, there are expectations of a pick-up in both costs and prices. Input price inflation of 2.8% is forecast for the year ahead ‒ the fastest projection across the UK. If this materialises it will be the joint sharpest rise in input costs in the region since mid-2012. Shortages of raw materials and components are likely to be part of the reason for this, particularly within the region’s manufacturing sector. In turn, companies expect to be able to increase their selling prices by 2.0%, which would be among the sharpest increases in nearly 15 years. Despite rising input costs, profits are forecast to increase by 5.8%, after suffering year-on-year contractions in each of the last four quarters.

Labour market

As well as this, wage costs are set to rise considerably over the next 12 months, both through a higher employment level and growth in average total salaries. The former is expected to increase by 2.4% in the year ahead, while the latter should see a 2.0% pick-up. These predicted upticks in staff levels and salaries are a return to pre-pandemic rates of increase.

Business challenges

The rise in salaries clearly stems from tighter labour market conditions. Reflecting this, the proportions of businesses for whom staff turnover and the availability of non-management skills are becoming more pressing issues have both risen in Q3 2021, to 30% and 19% respectively, the former is the joint highest rate across all UK regions.

As well as labour market concerns, several other issues are challenging businesses. In particular, transport problems have come to the fore. The percentage of businesses (34%) that cite this as a growing challenge is the highest it has ever been in the region. Shortages of capacity and staff in the road haulage sector is a likely factor, while COVID-induced travel restrictions continue to limit air freight capacity. There may also be a Brexit impact, with some businesses challenged by port delays.

Investment

With companies forecasting stronger sales and profits growth, investment plans have also been upgraded in the region. Capital investment is expected to increase by 3.1% in the year to Q3 2022, following a modest 1.5% rise over the last 12 months. A fall in the proportion of companies operating below capacity over recent quarters is also likely to be a driving factor here. And after contracting slightly, companies intend to boost Research & Development (R&D) and staff development budgets by 0.8% and 2.2% respectively in the coming year.