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ICAEW Business Confidence Monitor (BCM): North West

Q2 2021: Rise in business confidence fuelled by prospect of an upturn in sales growth

  • Sales have been weak over the last year. Domestic sales are lower in Q2 2021 than a year ago while exports contracted at a much sharper rate than nationally.
  • This weakness has fed through to profits, although the falls here have been cushioned slightly by an easing of labour and input costs. 
  • Employment levels have fallen over the past year, but the declines have been modest, thanks to the government’s furlough scheme.
  • Regulatory requirements and transport problems have come to the fore as growing challenges, partly linked to Brexit delays and COVID-19 containment measures. 
  • Even so, the North West’s Business Confidence Index has risen to its highest ever level in Q2 2021, underpinned by expectations of rebounds in sales and profits.
  • Businesses also intend to start hiring again, and to lift investment rates after restricting them during the pandemic.

The North West’s Business Confidence Index has risen to its highest ever level in Q2 2021, standing at +36.6. As elsewhere, sentiment is likely to have been buoyed by the progress made in vaccine distributions, and consequent expectations of a return to economic growth during 2021 and into 2022, as containment measures are eased.

Domestic sales and exports growth

The past year has been a particularly difficult one for companies in the North West. Exports contracted by 1.7% year-on-year, a much sharper fall than nationally. Although the decline in domestic sales was more modest at 0.4%, this is still considerably below the historical average for the region. 

Profits growth and input prices

The weakness in sales performance has put pressure on profits. Indeed, in the year to Q2 2021 profits declined by 0.9%, well below the historical average of 2.8% in the region. It is likely that the contraction would have been even more severe if not for an easing of costs. Input price inflation has slowed from 2.1% last year to 1.2% in Q2 2021. 

Labour market

Businesses have also reduced their wage bill over the past year. Average total salaries saw a year-on-year fall of 0.3% in Q2 2021, only the second contraction in the region since the global financial crisis. And businesses have cut the total number of employees by 0.9%, the joint fastest rate in the region since late 2012. However, the decline in staff levels is notably more modest than the fall seen during the financial crisis, with the government’s Coronavirus Job Retention Scheme helping to limit job losses during the pandemic. 

Investment 

The weakness in profits, together with the high level of uncertainty that businesses have faced during the crisis, has resulted in investment rates being low by the region’s historical norms. Capital investment and Research & Development (R&D) spending are up by just 0.1% and 0.3%, respectively, which compares unfavourably with their historical averages of 2.1% and 1.9%. 

Business challenges 

Immediate conditions remain very uncertain for businesses, and with renewed surges in coronavirus cases across the world, risks are skewed to the downside. Companies in the North West report a range of growing challenges, led by regulatory requirements. The proportion of businesses citing these has been exhibiting an upwards trend in recent quarters and now stands at 39%. 

It is possible that difficulties due to new regulatory processes following Brexit could be a reason here, as well as COVID-related measures. The same factors could also be driving the rise in the percentage of companies reporting transport problems as a more pressing issue. At 29%, this is the joint highest rate seen in the region since the survey began in 2004.  

Prospects for the next 12 months

While the past year has been challenging for companies in the region, businesses are gaining confidence from the gradual easing of lockdown measures and the likely return to economic growth in 2021 and into 2022. Companies expect domestic sales to expand by 6.4% in the 12 months ahead. Export growth will probably be slower at 1.8%, probably reflecting slower vaccine roll-outs in the rest of Europe, and perhaps a Brexit effect.  

Associated with these expectations, employee growth is forecast to be 3.2%, meaning the North West’s employment outlook is the second strongest across the UK, behind only Scotland. Faster sales growth should also support an expected rise in profits of 5.8%. In addition, investment rates are projected to pick up, with R&D budgets set to increase by 1.3% and capital spending by 3%.