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ICAEW Business Confidence Monitor (BCM): Northern England

Q1 2019: A tight labour market plus slow growth in domestic sales and profits are adding to Brexit concerns.

Company confidence is in negative territory, with Brexit uncertainty one of the likely causes. Staff turnover and the availability of management skills are also becoming more challenging, and the mix of slower domestic sales and modest price rises is restricting profits growth.

Business confidence trend in Northern England

Although business confidence in Northern England is above the UK average it is in negative territory for the second successive quarter, standing at -10.9 in Q1 2019. Brexit is clearly a factor in Northern England (as in all other parts of the UK) but it is probably not the only issue affecting sentiment.

Business challenges

Companies are also facing several growing challenges, with labour market concerns notably on the rise. In Northern England 20% of companies now express growing worries over the availability of management skills and 28% cite staff turnover, significantly up from the 10% and 17% recorded a year ago.  

Exports and domestic sales

Sales are disappointing too, at least as far as domestic markets are concerned. Export growth (4.3%) in Q1 2019 compares favourably with a year ago (2.9%), but domestic sales growth is down to just 2.7% in the year to Q1 2019 from 4.0% 12 months ago. This is also likely to be affecting confidence.

Profits, selling prices and costs

In addition, profit margins are being squeezed as businesses are struggling to achieve substantial increases in selling prices. These are trailing the pace of input price inflation (proving sticky at 2.8%) and total wage growth (2.2%). That, combined with slower domestic sales, is likely to explain much of the weakening of profits growth, from a rise of 3.2% a year ago to just 2.3% in Q1 2019. 

Investment and capacity

Slower sales growth has caused a rise in the proportion of businesses operating below capacity, from 51% last year to 66% in the year up to Q1 2019. It is now the highest across the UK. That, plus Brexit uncertainty, means that companies in Northern England are restricting their investment. Capital investment (1.7%) and staff development budgets (1.5%) are rising much more slowly than a year ago. 

Prospects for the next 12 months

Looking forward, businesses foresee some recovery in profits growth to 4.0%, supported by stronger domestic sales projections (3.5%) and a slight easing of input price inflation (2.4%). However, companies still plan to keep investment spending at modest rates in line with weak confidence. They intend to grow all forms of investment below 2%, with Research & Development budgets set to increase at the slowest pace − just 1.1%.