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Q1 2022: Businesses confidence remains high, reflecting healthy sales outlook.

  • The South East Business Confidence Index remains in a firmly positive position, with companies expecting stronger rates of sales growth in the year ahead.
  • However, the availability of non-management skills and staff turnover are both now more widespread issues than at any point in the region’s history.
  • Transport problems and regulatory requirements are also growing sharply as challenges, with both possibly impacted by Brexit-related complications.
  • Tighter labour market conditions are leading businesses to increase salaries.
  • Input costs increased at their fastest ever rate in the region in the year to Q1 2022. A similarly strong rise is planned in the year ahead.
  • Companies are passing on some of these costs to customers via higher selling prices. This, combined with improved sales, should help lift profits.
  • Investment rates have largely returned to pre-pandemic norms. Plans are strongest for capital investment due to improving demand and emerging capacity limits.

The South East’s Business Confidence Index has fallen slightly in Q1 2022, compared to the previous quarter. Nevertheless, it stands at +30.6, meaning that company sentiment is still comfortably above pre-pandemic norms and also above the UK average.

Domestic sales and exports growth

During the pandemic, sales performance in the South East was slightly more resilient than nationally. Part of this reflects the region’s favourable sectoral structure, with electronics and digital services having large presences in the South East, and likely to have benefitted during the pandemic from people adopting remote working and online shopping. The region is also less reliant on sub-sectors of manufacturing that were especially vulnerable during the pandemic, such as automotives.

This sales performance has strengthened in the current phase of the pandemic. Domestic sales increased by 5.1% in the year to Q1 2022, while exports saw a 2.8% rise. And in the year ahead, businesses expect sales growth to accelerate further, to 6.1% in domestic markets and 5.4% for exports. The latter is the strongest outlook across the UK, with the exception of Northern England.

Business challenges

The nature of the main challenges facing businesses has changed markedly since the height of the pandemic. Demand challenges have eased, while labour market issues have become more prevalent. The availability of non-management skills and staff turnover are both becoming more pressing issues for 41% of companies, the highest rates seen in the region since the survey began in 2004. Clearly many companies are struggling to fill vacancies. This partly reflects the emergence of labour-supply bottlenecks as businesses all try to recruit at the same time. Recruitment difficulties have also been amplified by people exiting the labour market during the pandemic.

Transport problems are also among the most widespread challenges. In Q1 2022, 40% of businesses are increasingly challenged in this area, compared to 33% nationally. Problems with freight capacity are likely to have been amplified by shortfalls in the supply of HGV drivers. Border problems because of Brexit may also be part of the explanation here. Indeed, difficulties in adapting to new practices following Brexit may help to explain why the percentage of companies increasingly challenged by regulatory requirements has been trending upwards over recent quarters.

Another challenge growing sharply is the tax burden. Historically this has been a minor issue within the region but in Q1 2022 it is now a growing source of difficulty for 27% of companies, the highest rate across all of the UK.

Labour market

Businesses are trying to overcome tighter labour market conditions by increasing average total salaries. These increased by 2.1%, year-on-year, in Q1 2022, and a further rise of 2.7% is expected in the year ahead. And labour market frictions are probably behind only a modest 2.0% increase in employment over the last 12 months, although companies anticipate that staff levels will be 3.3% higher by Q1 2023.

Input and selling prices, and profits growth

Transport capacity constraints, supply-chain disruptions, and an increase in global commodity prices have put upwards pressure on business costs. Annual input price inflation in Q1 2022 stands at 3.9%, the sharpest increase seen in the region since the survey began in 2004. And businesses do not expect much moderation in the coming year. Input prices are expected to be 3.7% higher in the 12 months to Q1 2023. Businesses do not plan on absorbing all these costs. Selling prices were lifted by 2.4%, year-on-year, in Q1 2022, and a broadly similar gain is projected over the next year. The rise in selling prices, coupled with improving sales, should be sufficient to offset cost increases. Businesses expect profits to grow by 6.1% over the year to Q1 2023. If achieved, this would be the strongest outturn since mid-2015.

Investment and spare capacity

Investment rates have largely returned to pre-pandemic norms in the region. And businesses plan to increase all types of investment spending in the coming 12 months. Growth will be fastest in capital investment, rising by 3.0%. Research & Development (R&D) will also see a healthy increase of 2.3%, a marginally stronger outlook than nationally. Rising demand is likely to be a key factor driving this expenditure. A low proportion of businesses operating below capacity, compared to historical standards, is a reflection of that