ICAEW Business Confidence Monitor (BCM): Northern England
Q1 2021: Post-Brexit trading worries weighing on company confidence
- Business confidence in Northern England is more subdued than in other parts of the UK in Q1 2021. Concerns over post-Brexit trade disruptions are likely to be a factor, given the region’s reliance on the EU market.
- Domestic sales and profits are down sharply, although exports have fared slightly better. Businesses have also cut their employee numbers over the last year.
- Against that backdrop, customer demand, late payments and the ability to expand into new areas are all widespread growing challenges.
- While there are several factors that could impede the pace of recovery, companies in the region anticipate strong rebounds in sales and profits growth.
- Based on these predictions, businesses plan to begin hiring again, and increase their investment spending in the year to Q1 2022.
Business confidence in Northern England (+3) has improved in Q1 2021, probably reflecting the roll-out of coronavirus vaccinations and the positive implications that this is likely to have for 2021 growth prospects. However, when compared to the rest of the UK, businesses in Northern England are among the most subdued. As well as the difficult financial situation that they currently find themselves in, concerns over post-Brexit trade disruptions may be weighing more heavily on companies’ confidence than elsewhere, considering the region’s goods exporters are among the most reliant on the EU market.
Domestic sales and exports growth and customer demand challenges
The past year has been an extremely challenging one for businesses, with the coronavirus pandemic leading to a collapse in output. As expected, businesses in Northern England report a contraction in domestic sales of 1.3% year-on-year in Q1 2021. In contrast, exports are up by 1.3% in the last year, although this figure is likely to have been distorted by Brexit-related activity and as a result, probably masks the severe challenges that exporters have faced during the crisis. For much of 2020, exports have fallen, particularly for the region’s automotive sector, as global demand has plunged. However, in the final months of 2020, exporters in the region may have seen a surge in orders from EU-based clients as they sought to safeguard against possible trade disruptions caused by the ending of the transition period. The net effect is that exports are slightly up from their level of a year ago.
Associated with these tough sales conditions, 52% of companies report customer demand as a growing challenge, the joint highest rate in the region for 12 years.
Concerns over the post-Brexit trading arrangement with the EU is another possible reason for the surge in the proportion of businesses experiencing growing concerns over their ability to expand into new markets. This has risen from just 7.0% of companies a year ago to 30% in Q1 2021. Another important factor is probably the adverse impact that both domestic and international travel restrictions have had on the ability of companies to engage in sales and marketing activity.
Selling prices, profits growth and late payments challenges
As companies have navigated through this weak demand environment, they have restricted selling price rises to just 0.7%, below the historical average for the region. This, combined with domestic sales declines, has resulted in profits falling by 2.7%, year-on-year, in Q1 2021. The clear financial pressures facing companies have meant that it is not surprising that nearly a third now cite late payments as a growing source of difficulty, more than double the rate reported a year ago.
Input prices and labour costs
Although the contraction in profits is among the largest ever reported by companies in the region, this has been cushioned somewhat by a reduction in costs. Firstly, input price inflation of just 0.5% is the lowest of any UK region in Q1 2021, and considerably slower than the 2.3% rise seen a year ago. Second, as sales have declined businesses have reduced their labour costs. Employment is slightly (-0.4%) down from 12 months ago, while the level of average total salaries is barely changed from last year.
Investment growth and plans
Against a backdrop of falling domestic sales and profits, investment rates are muted and well below historical averages for the region. Capital spending is barely changed from a year ago (up 0.4%), while Research & Development budgets (R&D) are up by just 0.7%. Associated with the fall in headcounts, staff development budgets have also been cut by 2.1% in Q1 2021, a considerably larger contraction than in any other region.
However, businesses plan to undertake some investment in the year ahead. Both capital spending and staff development budgets are set to rise by 1.1%, with growth in the latter probably linked to the projected 1.5% increase in employee numbers over the next year. Faster still is the planned increase in R&D budgets of 1.5%, a stronger rate than for the entire UK.
Prospects for the next 12 months
With the roll-out of the coronavirus vaccine now underway, businesses anticipate growth in domestic sales and exports of 6.1% and 3.8% respectively in the year to Q1 2022. That should feed through to profits, which are expected to rise by 6.3%. If this achieved, it will be the fastest increase in profits since the beginning of 2015.