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ICAEW Business Confidence Monitor (BCM): South East

Q1 2019: Subdued investment plans reflect underlying weakness in business confidence.

Business confidence in the South East remains in negative territory. Brexit uncertainty is dampening business sentiment, offsetting the likely benefits achieved from strong growth in sales and profits. The impact of that is evident in the cautious investment behaviour of businesses, both over the last year and planned for the year ahead.

Business confidence trend in South East

South East business confidence has weakened in each of the last three quarters and stands at -12.3 in Q1 2019. Brexit uncertainty is likely to be weighing heavily on a range of sectors in the South East including exporters such as pharmaceuticals and engineering. 

Business challenges

Aside from Brexit, there are other challenges for companies in the South East, particularly the labour market. Over the past year there has been an upward trend in the proportion of companies reporting growing concern over the availability of management as well as non-management skills, reaching 19% and 26% of businesses respectively. The tightness of the South East labour market is a possible explanation for such concerns over skill shortages, with the region’s unemployment rate (3.2%) among the lowest in the UK. 

Domestic sales and exports

Despite these factors weakening confidence, companies are currently achieving strong sales growth. Domestic sales (3.9%) and exports (4.5%) are rising at faster rates than a year ago and are both outperforming their respective national averages. Relatively healthy sales performance is also consistent with a fall in the proportion of companies citing customer demand as a growing issue, from 39% a year ago to 28% in the year to Q1 2019. 

Profits

Sales increases are helping to push profits up as well by 3.6% year on year in Q1 2019, compared to 3.2% a year ago. This is in contrast to the slowdown in profits growth seen at the national level. 

Investment

Despite positive developments on sales and profits, ongoing uncertainty about Brexit is likely to be the main reason why companies are cautious about investments. All forms of investment grew by less over the past year than in the previous 12 months, with Research & Development budgets growing slowest at just 1.2%. 

Prospects for the next 12 months

The situation looks set to continue in the year ahead, with companies expecting to achieve similar rates of growth to those of the last 12 months. They foresee domestic sales and exports increasing by 4.0% and 4.2% respectively, and profit rising by 3.8%. However, planned investment growth is set to remain muted, with further Brexit uncertainty likely to be a significant factor. Businesses plan to increase capital investment by just 1.4%, a slower rate than reported in the past year. If such subdued rates persist beyond that, then that could have significant long-term implications for the South East economy.