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ICAEW Business Confidence Monitor (BCM): Northern England

Q2 2021: Confidence in Northern England has improved but lags the rest of UK

  • Businesses have experienced falls in domestic sales and profits over the past year, albeit at more modest rates than for the UK as a whole. 
  • In contrast, export levels have remained stable over the past year, with declines during the early period of the crisis perhaps balanced out by a temporary surge in orders in late 2020 from EU-based customers. 
  • Concerns over customer demand have eased slightly, but problems with regulatory requirements and transport have become more prominent. 
  • Although the Business Confidence Index has improved markedly in Q2 2021, it is still the lowest of any UK region.
  • This may partly stem from more subdued growth expectations for sales, profits and employment than nationally. 
  • The more cautious outlook may reflect the less severe falls in sales over the last 12 months but could also relate to the concerns businesses have as they adjust to the new UK-EU trading relationship.

Northern England’s Business Confidence Index has risen sharply in Q2 2021, standing at +27.7. However, this is some way below its record level of +45.5 in Q1 2014, and it is the lowest of any UK region. This may be because sales did not fall in the region by as much as they did nationally, and (perhaps in consequence) are not expected to rebound quite as strongly. 

Domestic sales and exports growth 

In the year to Q2 2021 domestic sales contracted by 0.6%, compared with a national decline of 1.7%. Export sales were also flat over the same period. The latter may have been distorted by a Brexit-induced surge in 2020, as companies sought to avoid possible border difficulties as the UK approached the end of its transitionary period with the EU. Northern England is more dependent on EU exports than most other UK regions. 

Employment

Businesses in Northern England cut their employee numbers slightly over the past year, at 0.4% the reduction was modest compared with the fall in domestic sales. By way of comparison, following the global financial crisis businesses in Northern England reported year-on-year falls in employment of more than 3%. The softer blow to the labour market during the pandemic is largely due to the government’s furlough scheme, although the possible scramble to deliver export orders before the end of the year may also have been a factor.

Selling prices and profits growth

Over the past year companies have achieved almost no increase in selling prices to customers. This, coupled with declines in sales, has resulted in profits being 0.8% lower than they were in the previous year. That said, as with sales, the fall in profits has been less steep than across the UK as a whole. 

Investment

Against a backdrop of lower sales and profits, companies in Northern England have cut back on their capital spending. In the 12 months to Q2 2021 capital investment declined by 0.6%, a slightly steeper fall than nationally. In contrast, the growth in Research & Development (R&D) budgets was, at 0.8%, among the faster rates across the UK.

Business challenges

Although business confidence has improved, conditions remain uncertain and companies face several challenges. While customer demand challenges are slightly less widespread than in recent quarters, concerns over the post-Brexit trade environment appear to be revealing themselves through the increased prominence of regulatory requirements as a growing source of difficulty, with nearly 40% of businesses citing these in Q2 2021. Transport problems have also surged as a rising concern, probably partly reflecting Brexit-induced port delays as well as the impact of COVID-19 restrictions. In Q2 2021 29% of businesses are experiencing transport problems as a rising issue, compared with 19% a year ago.

Prospects for the next 12 months

With the roll-out of the coronavirus vaccines now gathering pace, businesses in Northern England expect a rebound in sales growth. However, when placed in the national context, sales projections in the region are unremarkable, which, in turn, may help to explain why confidence is at the lower end of the UK spectrum. Expectations for growth for both domestic sales (5.2%) and exports (2.5%) trail their respective national forecasts.

A similar story is true for profits. Although businesses do plan to increase employment levels by 1.5%, this is one percentage point behind the national figure. Investment rates should pick up over the next 12 months, although these are not expected to vary markedly from their respective national rates. Capital investment should see the fastest rise at 3%.

As we noted above, this cautious outlook may reflect the fact that sales and profits did not fall as fast over the past year in the North as in many other regions. It is also possible that concerns over potential Brexit trade frictions may be particularly hampering business sentiment in the region.