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 has slipped further into negative territory. It is now at the lowest recorded level since early 2009.
- Domestic sales growth compares favourably with the UK average. However, export growth has been weak when compared to other UK nations and regions.
- Businesses are contending with the joint-fastest rise in input price inflation across the UK. By comparison, selling prices are rising at a more modest pace, possibly due to widespread concerns relating to customer demand.
- The availability of non-management skills and staff turnover remain prominent concerns for businesses, but are starting to ease off. Financial challenges, such as access to capital, are more acutely felt by businesses than previously. The same can also be said for issues relating to government support.
- Growth in both capital investment and Research & Development (R&D) budgets is among the weakest across the UK. This looks set to remain the case in the year ahead.
Business confidence in the North East
The North East’s Business Confidence Index has been on a clear downward trajectory over the past year and has now moved even deeper into negative territory. In the latest survey, the index sits at -22.8, the lowest recorded reading for the region since Q2 2009.
Domestic sales and exports growth
Sales performance has been mixed. Annual domestic sales growth stands at 6.2%, slightly outperforming the UK average of 5.9%. However, export growth has been considerably weaker by comparison. Indeed, a rise of just 2.3% is the second lowest across the UK, behind only the North West. The region is one of the UK’s more prominent exporters, but key sectors such as chemicals have been adversely impacted by the global surge in commodity and energy prices, the slowdown in economic activity and supply-chain disruptions. In the 12 months ahead, businesses expect domestic sales growth to moderate to 4.1%. Conversely, export growth (3.4%) is expected to improve slightly. However, both forecasts trail their respective UK outlooks.
Input and selling prices, and profits growth
Businesses in the North East are clearly still vulnerable to the ongoing supply-side disruption and rises in commodity prices, probably reflecting the importance of the automotive, chemicals and energy sectors to the region. Indeed, annual input price inflation now stands at 6.4%, the joint fastest across the UK, along with the East Midlands. This marks the fastest rise in the region since the start of the survey in 2004. A further increase in input prices of 5.5% is expected in the coming 12 months, which is the strongest outlook across all UK nations and regions.
Despite experiencing the joint-sharpest rise in input costs, selling price rises are broadly in line with the UK average, at 3.9%. Part of the explanation for this is that customer demand is growing as a widespread challenge for businesses. A similar increase of 3.8% is planned for the coming year.
Given the modest rise in exports and strong input cost pressures, profits growth (3.8%) trails the UK average. A slower outturn of 3.1% is expected in the year ahead. Only businesses in the West Midlands and the East of England anticipate weaker increases.
Labour market
Employment growth (2.9%) among businesses in the North East is just below the UK average, but is expected to slow markedly in the 12 months ahead. A 1.4% rise in staff levels is projected, a slower rate than expected, UK-wide. Average total salary growth is also among the slowest across the UK, although, at 3.5%, it’s still some way above the region’s historical average. This reflects high inflation rates and the upwards pressure this has had on wage claims. A 4.0% rise in salaries is expected in the 12 months ahead.
Business challenges
The availability of non-management skills (38%) and staff turnover (38%) continue to be among the more widespread growing challenges for companies in the region. However, both are less prominent than they were earlier in the year, suggesting that recruitment difficulties are gradually starting to soften. Another important supply-side issue is transport problems, which, at 31%, remains markedly above the region’s historical trend.
Regulatory requirements are once again the most widely cited issue faced by companies in the region, after easing slightly during the pandemic and the early part of the recovery phase. Indeed, 39% of companies now cite these, surpassed only by Scotland and London.
Against a backdrop of tighter financial conditions due to higher interest rates and growing economic uncertainity, access to capital (22%) is now more widely reported than at any time since Q4 2012. A similar story is also apparent for bank charges, with the proportion of companies (21%) citing these at its highest rate since Q1 2012.
This tough financial setting may be part of the reason why government support is regarded as a growing source of difficulty for businesses. In the latest survey, 23% of companies report this issue, the highest percentage across all UK nations and regions.
Investment
Given the weaker expectations for export sales and profits growth, and a difficult financial backdrop, investment rates are subdued among businesses in the region. Growth in capital investment of just 2.8% is the second slowest across the UK, outpacing only Scotland. And barely any change in the level of spending is planned in the year ahead, with projected growth of just 0.4%. For R&D budgets, growth in the year to date stands at 1.5%. Only businesses in Scotland and Yorkshire & Humberside are seeing weaker increases. And a slight moderation to 1.4% is set for the coming 12 months.