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ICAEW Business Confidence Monitor (BCM): North West

Q4 2021: Healthy sales and investment outlook despite labour market challenges.

  • The North West’s Business Confidence Index remains firmly in positive territory.
  • Following an initial rebound as COVID-19 restrictions were eased, sales growth is projected to gain further momentum in the year ahead.
  • A recovery is underway in the labour market. Growth in employment and salaries is picking up and is expected to improve further in the year ahead.
  • However, challenges in the labour market are revealing themselves, with the availability of skills and staff turnover becoming much more pressing issues.
  • Regulatory requirements and transport problems are also very prominent concerns. Brexit could be part of the story here. 
  • Input costs are increasing sharply, although businesses are passing some of these costs onto customers through higher selling prices.  
  • Companies plan to increase capital investment at a faster rate than elsewhere in the UK over the next year as demand rises and capacity constraints emerge.

The North West’s Business Confidence Index remains well above the region’s historical average in Q4 2021, at +36.6. Company sentiment is probably being supported by expectations of further improvements in sales performance as the economy continues to recover. That said, the Index is below the record high seen in the previous quarter, which may be associated with a number of supply-side challenges that businesses are currently facing. 

Domestic sales and exports growth, and customer demand as a growing challenge

Businesses in the North West endured significant difficulties during 2020 and the early part of 2021 as COVID-19 restrictions depressed demand both domestically and internationally. However, since the easing of containment measures, economic activity has rebounded sharply. The net effect is that domestic sales are 3.2% higher year-on-year in Q4 2021. This is in line with the national average. Exports have also recovered, rising by 1.9% over the last year, which slightly outpaces the national rate. And businesses anticipate much stronger rates of growth in the year ahead, as the recovery gains more impetus. Domestic sales are projected to outperform the UK, with an expansion of 6.7%. This would be the fastest increase ever seen in the region since the survey began in 2004. Export growth is also forecast to pick up, albeit at the more modest rate of 3.8%.

Related to this, customer demand as a growing challenge has eased in prominence. In the 12 months to Q4 2021, 34% of businesses have been increasingly challenged by this, significantly lower than the pandemic peak of 56% in Q4 2020.

Labour market

Associated with the healthier demand environment, businesses have started to increase their headcounts. Year-on-year employment growth in Q4 2021 stands at 1.6%. A further 3.0% increase is planned for the year ahead, a near record rate for the region. In conjunction with this, staff development budgets are expected to rise at a similar pace to employment. And as the labour market recovers, so too should average total salary growth. After barely changing during the pandemic, companies plan a 2.9% increase over the coming year.

Business challenges

Businesses may also be planning to increase salaries to tackle some of the issues that they are dealing with in the labour market. Labour shortages are apparent as many companies try to recruit staff at the same time. Consequently, the availability of management and non-management skills have surged as growing challenges in the year to Q4 2021, with the former cited by 26% of companies and the latter by 38%. Both are record rates for the region since the survey began in 2004. Difficulties in recruitment are also reflected in staff turnover as a growing source of difficulty for 43% of businesses. This is also a record high for the region.

Beyond labour market challenges, transport problems are also widespread, and a more pressing issue for 34% of companies. This is the joint highest rate since the survey began and probably reflects freight capacity constraints as demand surges, including a shortage of HGV drivers. It is also possible that businesses have had difficulties in adjusting to new Brexit-related procedures and border controls. Adding to these obstacles, regulatory requirements are more widely cited in the region as a growing challenge than elsewhere in the UK. Again, Brexit may be part of the explanation here.

Input and selling prices, and profits growth

As the regional economy recovers, input costs have increased for businesses. Rising prices for energy and raw materials, supply-chain disruptions and transport issues are likely causes of this. These cost pressures are likely to persist in the year ahead. Following a 3.0% increase year-on-year in Q4 2021, input price inflation of 2.5% is expected. And some of these higher input costs will filter through to customers; selling price increases of 1.3% are expected in the coming 12 months. The combination of rising sales and higher selling prices is expected to more than offset any damage to profits from higher labour and input costs. Profits are projected to increase by 6.1% in the year to Q4 2022, which would be the joint fastest rate seen in the region in almost 15 years. 

Investment 

With companies forecasting stronger sales and profits growth, investment intentions have also been upgraded in the region. Businesses plan the sharpest increase in capital investment across all of the UK over the next 12 months, at 4.0%. A fall in the proportion of companies operating below capacity may also be a driving factor behind this.