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ICAEW Business Confidence Monitor (BCM): Northern England

Q3 2021: Business confidence rises to its highest ever level.

  • The Business Confidence Index has climbed to new heights in Q3 2021. This reflects expectations of a near-record rise in domestic sales for the year ahead. 
  • As demand recovers, employment levels should increase. And salary growth should return to the rates seen before the crisis.
  • However, labour market tightness is a growing issue, with staff turnover and the availability of non-management skills now more prominent concerns.
  • Input prices are creeping up, but businesses plan faster increases in selling prices over the next 12 months. 
  • Investment plans have also been upgraded, boosted by a decline in spare capacity as demand rebounds.

Northern England’s Business Confidence Index has climbed further in Q3 2021, standing at +47.3. This is the highest level in the region since the survey began in 2004. It is clearly linked to business expectations of a strong rise in sales for the year ahead, although announcements by both Nissan and Britishvolt of major investments in the region will also have boosted business confidence.

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

The past 12 months have been very challenging for businesses in Northern England. Domestic sales (-0.5%) and exports (-1.9%) both contracted at sharper rates than nationally. The latter is particularly concerning as businesses in Northern England are among the most export-intensive across the UK. But the recent easing of restrictions and the reopening of the economy now provide the basis for a strong rebound in sales over the rest of 2021 and into 2022. Exports are projected to rise by 2.9%, while domestic sales are forecast to expand by 6.4% over the next 12 months. If achieved, this would be the fastest growth on record for domestic sales, and an above-average outturn for exports.

Reflecting this healthy sales outlook, the percentage of businesses citing customer demand as a growing challenge has fallen considerably when compared to recent quarters. It now stands at 29% compared to its pandemic peak of 52%.

Labour market

Businesses in Northern England reduced their staff numbers slightly over the past 12 months, although the 0.5% fall was modest when put in the context of sales performance. This largely reflects the positive impact of the government’s Coronavirus Job Retention Scheme in limiting job losses. There were concerns that unemployment would rise once the scheme is entirely phased out in September, however businesses plan a 2.5% increase in employment in the year ahead. This represents a return to more familiar pre-pandemic growth. Companies also anticipate a pick-up in average total salaries of 2.0%, following a contraction over the last year.

Business challenges

The expected rise in salaries may also reflect growing concerns over staff turnover and the availability of non-management skills. The proportions of businesses citing staff turnover (30%) and non-management skill availability (27%) are higher in Northern England this quarter than in any other part of the UK, with the exception of the North West for staff turnover. On a more positive note, late payments have become a less prominent growing challenge.

Input prices, selling prices and profits

Companies have also seen an uptick in input price inflation over the last 12 months of 1.7%. And they a expect a further 1.6% increase in the year ahead. Businesses also intend to increase their selling prices at a pace of 1.3%, so slightly faster when compared to the past year. And the combination of much stronger sales growth and selling price gains should help drive profits up by 6.5%. If achieved, this would be the sharpest increase in profits in over six years.

Investment and spare capacity

The expected rise in profits should provide an important basis for improved investment rates. After barely making any changes over the last 12 months, businesses plan to increase capital investment by 3.0% in the coming year, in part because of evidence of emerging capacity constraints. In Q3 2021, 54% of businesses report being below capacity, 10 percentage points lower than in Q4 2020. Other forms of investment are also set to rise. Research & Development (R&D) budgets are forecast to be 1.7% higher in the year to Q3 2022. Growth in staff development budgets should also return to pre-pandemic norms as companies start hiring again.