The latest Business Confidence Monitor (BCM) shows business confidence falling further. Difficult economic conditions continue, though there has been some easing in the political turmoil of the previous period, which seriously unsettled financial markets. As a result, some economic stability has been restored, even though September’s events have resulted in higher interest rates, taxes and government borrowing, and lower government spending. But the global economic background continues to look very challenging.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period 17 October to 16 December 2022.
- The Business Confidence Index for the North West has slipped further into negative territory. It is now at its lowest recorded level since mid-2009.
- Domestic sales growth compares unfavourably to the UK average. Exports are rising at the slowest pace across the UK. They are expected to pick up slightly in the year ahead while domestic sales growth weakens.
- The availability of non-management skills and staff turnover remain prominent challenges for businesses, although pressures here appear to be easing from recent survey periods as the economy slows.
- Financial challenges are coming to the fore, particularly relating to late payments and access to capital. Transport problems are also widespread.
- Salaries are rising at a near-record rate, with a similar rise planned for the year ahead. Employee numbers are also rising, but growth here is set to slow.
- Annual input price inflation is running at the fastest rate since the start of the survey. Cost pressures are expected to ease slightly in the coming 12 months.
- Reflecting the weakening in overall business sentiment, growth in both capital investment and Research & Development (R&D) budgets is set to slow over the next year.
Business confidence in the North West
The Business Confidence Index for the North West has fallen for the sixth successive quarter and now sits at -23.0. This is the lowest recorded reading since Q2 2009.
Domestic sales and exports growth
Domestic sales are rising by 5.4%, year-on-year, in the latest survey period. This compares unfavourably to the UK average and only businesses in Yorkshire & Humberside and the West Midlands report slower outturns. Further still, export growth of 2.2% is the weakest rate of increase across any UK nation or region. In the year ahead, companies anticipate a slowing of domestic sales growth to 5.0%. Export growth is expected to improve to 3.2%, although this still trails the UK outlook.
Business challenges
Businesses continue to face difficulties in the labour market. The proportions of companies reporting staff turnover and the availability of non-management skills as growing challenges are now 39% and 37% respectively. Both remain over twice their historical averages, despite falling slightly from the peak levels recorded in the previous survey period.
Financial conditions have worsened for businesses in the North West, with 26% of companies reporting late payments as a pressing issue, which is higher than all other UK nations and regions. Access to capital has also become a more prominent challenge, possibly reflecting recent interest rate increases. After being reported by just 3% of companies in Q1 2022, the problem has now spread to 19% of companies, the highest proportion in the North West since Q4 2012.
Transport problems are also widespread and are cited by 39% of companies in the region. This issue has surged in recent survey periods to its highest level since the survey began and is now more prominent than elsewhere in the UK.
Labour market
Against a backdrop of persistent recruitment challenges, labour costs are rising sharply for businesses. Average total salaries are increasing at the fastest rate since Q4 2004. The 4.3% rise is the joint fastest across the UK, along with the East of England and Yorkshire & Humberside. Employment growth also matches the national average, increasing by 3.1%, year-on-year. However, a more moderate rise of 2.3% is planned for the next 12 months, reflecting slower domestic sales expectations and continuing weak export growth.
Input and selling prices, and profits growth
In addition to increasing labour costs, input price inflation has reached a record rate for the region. Clearly businesses are still being disrupted by supply-chain problems, while the Ukraine-Russia war means that energy and commodity prices remain high. Annual input price inflation of 6.2% is among the steepest across the UK, with only businesses in the East Midlands and North East facing sharper rises. A softer increase of 4.6% is expected over the next year, suggesting that businesses expect input cost pressures to gradually ease.
As a result of increased wage and input costs, businesses are pushing up selling prices by 3.3%, three times the historical average for the region. A 2.6% increase is planned for the year ahead.
The increases in sales and prices have, however, managed to offset the impact of increasing costs on profits, which are up 5.2%. This is the second fastest in the UK, behind the East Midlands. But businesses in the North West expect profits growth to slow over the next 12 months to 3.5%, bringing them closely into line with the UK average.
Investment
Despite the difficult backdrop, businesses are increasing their investment spending. Capital investment growth stands at 3.2%, a rate that matches the UK average. R&D budgets are up by 3.0%, with only businesses in the East Midlands reporting a sharper rise. However, the weakness in business confidence is revealing itself through the outlook for the next year. Capital investment growth is expected to slow to 1.2%. A similar story is apparent for R&D budgets, which companies plan to increase by the modest rate of 1.9%. This is a concerning development given the importance of both types of spending on the productivity and competitiveness of business in both domestic and international markets.