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ICAEW Business Confidence Monitor (BCM): South East

Q3 2021: South East businesses among the most optimistic in the UK.

  • The South East Business Confidence Index is comfortably above the UK average in Q3 2021. This partly stems from a particularly bullish outlook for sales performance in the year ahead.   
  • Customer demand challenges have eased, and late payments are also a less pressing issue than in recent quarters. 
  • As demand recovers so too should employment. Growth in staff numbers is projected to be the fastest seen since the survey began. 
  • That said, businesses are becoming increasingly challenged by the availability of non-management skills and staff turnover as the economy expands. 
  • The recent upturn in activity has also seen input costs creeping up for businesses, reflecting supply shortages and production bottlenecks. 
  • Growth across all forms of investment spending should improve in the year ahead. Capital investment growth will be the fastest across all of the UK. 

For the second successive quarter, the South East’s Business Confidence Index has climbed to its highest ever level, at +50.5, since the survey started in 2004. This places the region among the most optimistic parts of the UK, with only the West Midlands and London ranked higher. A sharp uptake in vaccines and expectations of rising sales have no doubt helped to boost sentiment in the region. 

Domestic sales and exports growth 

Domestic sales are 0.9% higher than their level a year ago, the joint fastest rise across the UK along with Wales. In contrast, exports suffered a very modest 0.2% fall over the last 12 months. The region’s sectoral composition is a major factor here. The digital and electronics sectors have a relatively large presence in the South East, especially along the M4 corridor, and these sectors have seen demand rise during lockdowns. Coupled with this, the region is more sheltered from those manufacturing sectors such as automotive manufacturing and aerospace, that were hit particularly hard by the pandemic. Companies in the region are also upbeat about their prospects for the year ahead. Growth in both domestic sales (7.6%) and exports (4.6%) are expected to outpace their respective national rates.

Labour market

Over the past year businesses have restricted employment, with job numbers barely changing from the year before. However, as demand surges companies plan to increase their headcounts by 3.2%. If this were to materialise, it would be the fastest increase in the region since the survey began. Linked to this, average total salaries are projected to pick up, with growth of 2.2% set for the next 12 months.

Business challenges

The expected rise in salaries may also reflect growing concerns about labour market conditions. As the economy expands, the proportions of businesses citing the availability of non-management skills (20%) and staff turnover (18%) as more pressing issues have risen markedly from recent quarters. As a result, some businesses in the region have been unable to open at full capacity despite high levels of demand.

As well as difficulties in the labour market, regulatory requirements are a growing challenge for 38% of businesses, making this the most widely cited issue in the region. This is likely to be due to difficulties that many businesses have had in adapting to COVID-related restrictions. New post-Brexit trading rules could also be weighing heavily on some businesses.

On a more positive note, the percentage of businesses viewing customer demand as a more pressing issue has eased considerably to 32% in Q3 2021, compared to 57% in Q4 2020. Late payments are also a less widespread concern ‒ 25% of companies now cite this, after standing at 31% in each of the previous three quarters.

Input and selling prices and profits growth

The gradual recovery in demand has resulted in supply shortages and bottlenecks for some businesses. Over the past 12 months input costs increased by 1.4%, and a further 1.9% rise is projected for the 12 months ahead. And while businesses plan to try and offset this by increasing selling prices, these are forecast to rise at the slowest rate (0.9%) of any region. Despite that, the strong rebound in sales performance should help push profits up by 7.7% over the next year. If achieved, this would be comfortably the strongest profits growth in the region since the survey began.

Investment

Investment rates should also return to more familiar pre-pandemic territory over the next year. Capital investment growth of 3.8% should outpace all other regions and nations in the UK. Spare capacity has fallen sharply, so businesses need to expand their capital stock to meet the predicted surge in demand. Research & Development budgets are also expected to rise at the faster rate of 2.0%, when compared to the past year. Plans for higher staff levels are also reflected in the outlook for staff development budgets. These are projected to expand by 2.6% after being cut over the last 12 months.