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ICAEW Business Confidence Monitor (BCM): South East

Q2 2021: Strong sales outlook pushes Confidence Index to highest ever level

  • Businesses in the South East suffered less severe falls in sales over the past 12 months than in many other regions. 
  • However, sales performance has been very weak by historical standards, and this has put significant downward pressure on profits over the past year.
  • Employee numbers have also been cut, while investment spending has grown only slowly. 
  • As well as wider concerns over coronavirus, businesses are being increasingly challenged by regulatory requirements and by transport problems. 
  • Even so, businesses are optimistic about future conditions. The region’s Businesses Confidence Index has reached its highest ever level.
  • Sales projections are among the strongest across the UK and employment levels are expected to rise in the year ahead as demand returns. 
  • Profits are also expected to rebound sharply, supporting faster rises in investment, particularly for capital spending.

The South East’s Business Confidence Index has climbed to its highest-ever level in Q2 2021, at +42. The large majority of companies in the region are optimistic about business conditions in the year ahead. Clearly, the swift roll-out of vaccines and the decline in infection rates have been the driving factors here, bolstering recovery prospects for businesses in the South East.  

Domestic sales and exports growth 

This rise in confidence follows a year in which sales have fallen, but by less than in most other regions. Domestic sales have suffered a year-on-year fall of 1.3%, and exports are 0.2% below their levels from the year to Q2 2020. The region’s sectoral composition helps to explain the resilience of sales, compared with other regions. The electronics and digital sectors have above-average presences in the region, particularly along the M4 corridor, and these industries have experienced rising demand during the pandemic. In addition, the region has limited exposure to those sectors, such as aerospace and automotives, which have been especially vulnerable to the downturn in economic activity. 

Selling prices and profits growth

Even so, businesses in the region have seen their margins squeezed over the last 12 months. While sales have not fallen as sharply as in many other regions, sales performance is still considerably weaker than historical norms. And given subdued demand, businesses have been careful not to substantially increase their selling prices. These are up by just 0.5% year-on-year. The overall effect of weak price increases and declines in sales is that profits are 3.5% below their level from a year ago. This is the joint steepest contraction seen in the region since the survey began. 

Labour market

The difficulties of the past year have also resulted in businesses reducing their headcounts. In the 12 months to Q2 2021 employee numbers contracted by 1.0%, a slightly deeper fall than nationally. However, the fall here is shallower than the contraction seen following the global financial crisis, thanks in large part to the government’s Coronavirus Job Retention Scheme. Businesses have also lowered their wage bills through a 0.5% cut in average total salaries. 

Investment

Given the decline in sales and profits during the pandemic, businesses have understandably restricted their investment rates. Both capital investment and Research & Development (R&D) budgets barely changed from the year before. 

Business challenges

Despite the upturn in the region’s Confidence Index, businesses still face major uncertainties, particularly relating to the evolution of the coronavirus pandemic both domestically and globally. As well as these underlying concerns, businesses also report several growing challenges, led by regulatory requirements. Indeed, 46% of companies cite these in Q2 2021, meaning they have now overtaken customer demand as the region’s most widespread challenge. Changes due to COVID-19 are likely to be part of the explanation for this, and difficulties with new regulations in the wake of Brexit may be another factor. 

The proportion of companies citing transport problems as a more pressing issue has also surged markedly over the past year, and now stands at its highest ever rate in the region at 34%. Here too, both Covid and Brexit are likely factors. In addition, late payments became much more widespread as a growing challenge when the pandemic set in, and have remained so, reflecting the financial pressures that many businesses have been under. 

Prospects for the next 12 months

With the vaccine programme now gathering pace and the UK approaching the final stages of the government’s roadmap out of lockdown, businesses are upbeat about their prospects for the coming year, despite the continuation of some significant risks. Domestic sales are projected to rise at the fastest rate across all the UK in the year ahead, at 8.4%. If achieved, this would be the fastest rate of growth in the region on record. Businesses also anticipate growth in exports of 4.7%, with only Scottish companies having stronger expectations. The outlook for sales growth may also help to explain why the proportion of businesses citing customer demand as an issue, although still widespread, has eased in Q2 2021. And companies in the South East plan to increase employment levels by 2.7%, following a decline in the past year.

Businesses also forecast record rates of profits growth in the year ahead. This should help support faster investment growth. Capital investment is projected to increase by 3.0%, while R&D budgets are expected to be 2.1% higher in the coming year.