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Economic Insight

ICAEW Business Confidence Monitor (BCM): Northern England

Business Confidence Index slips further amid supply-side problems

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.

  • Northern England’s Business Confidence Index has weakened considerably in Q2 2022.
  • Businesses nevertheless have experienced strong domestic sales growth which they expect to continue, while the outlook for export is more muted.
  • Companies continue to face supply-side issues. Input costs are rising steeply and are expected to increase at the fastest rate across the UK in the year ahead.
  • Labour costs are also rising, both through stronger employment growth and higher wages.
  • Higher wages are probably linked to widespread issues with staff turnover and the availability of non-management skills.

Transport problems also remain a prominent growing challenge, while the tax burden has moved to the fore. 

Business confidence in Northern England

The Business Confidence Index for Northern England has weakened markedly in Q2 2022. At +12.9, the region stands at the lower end of the index, with only companies in Scotland having a lower reading. As in most other regions in the UK, while businesses are achieving healthy increases in sales, they are also having to contend with a number of growing challenges, particularly with respect to labour market frictions and higher input costs. 

Domestic sales and exports growth

Businesses are currently seeing strong sales growth, following the low levels during the pandemic. In domestic markets, sales increased by 5.7% year-on-year in Q2 2022, the fastest rate since mid-2008. And in the year ahead, businesses anticipate a further rise. Export growth has been more modest, at 2.6% in Q2 2022, marginally slower than the national figure. The outlook for exports is also fairly muted, meaning that only companies in the North West have weaker expectations. It is possible that Brexit-induced trade frictions could be playing a role here, given that exporters in the region are among the most reliant on the EU market. 

Input prices, selling prices and profits

Business sentiment is being weighed down by mounting cost pressures. Against a backdrop of supply-chain disruptions and heightened global commodity prices, annual input price inflation in Q2 2022 stands at 4.5%. This is the joint fastest rate, along with Wales and Yorkshire & Humber, across the UK. Further still, businesses expect input price inflation of 5% over the next year, which is the strongest projection across all UK nations and regions. The motor manufacturing and chemicals sectors, both important in the north, are particularly exposed to global cost rises.

To try and offset this, businesses are pushing up their selling prices charged to customers. In the year to Q2 2022, selling prices are 2.6% higher than the previous 12 months and a 3.1% increase is planned for the coming year. The net effect of higher prices and sales is that profits are growing sharply. These increased by 5.0% in Q2 2022, with similar growth forecast.

Labour market

As well as input cost pressures, businesses face higher labour costs. Employment growth has picked up, increasing by 2.6% in Q2 2022, and is expected to be 3.1% higher by Q2 2023. Average total salary growth has also gathered pace, with a 3.1% rise over the last year. This marks the sharpest increase in over a decade. A similar 3.2% rise is planned for next 12 months. 

Business challenges

Higher salaries appear to be an attempt by businesses to tackle the current labour market difficulties they face. These difficulties stem from companies all trying to recruit workers at the same time, and have been exacerbated by post-Brexit limits on hiring workers from the EU, and by people exiting the labour market during the pandemic. Indeed, the availability of non-management skills is a growing issue for 45% of companies, the highest rate seen in the region since the survey began. Staff turnover is also a growing source of difficulty for 40% of businesses, the joint highest rate ever seen in the region, alongside the previous quarter. 

The proportion of companies being increasingly challenged by transport problems (29%) is well above the region’s historical norms. This may reflect ongoing shortages in the supply of HGV drivers, as well as port delays due to Brexit. Another challenge that has risen in prominence is the tax burden. This is now a pressing issue for just under a quarter of companies, the highest rate in the region since mid-2011. 

Investment

The recovery in demand, coupled with emerging capacity constraints, has caused businesses to boost their investment plans. Growth in both capital investment and Research & Development (R&D) budgets have returned to pre-pandemic norms, at 3.6% and 2.5% respectively. Companies also plan further, albeit slower, increases over the next year, of 2.3% and 1.8% respectively.