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ICAEW Business Confidence Monitor (BCM): South West

Q3 2021: Business confidence reaches new heights in the South West.

  • The Business Confidence Index has risen to its highest ever level in the South West.
  • This is underpinned by a very strong sales outlook. Businesses expect the fastest export growth across the UK, while only in the East Midlands are they anticipating a sharper rise in domestic sales.
  • Employment levels are also projected to increase at the fastest rate across the UK. However, businesses are becoming more concerned over the availability of non-management skills and staff turnover.
  • Probably in response to this, companies plan to increase average total salaries in the year ahead.
  • Transport problems and regulatory challenges have come to the fore, as companies deal with COVID-related restrictions and Brexit disruptions.
  • Supply shortages and transport challenges also help to explain why input price inflation is picking up.
  • More encouraging is the fact that businesses have upgraded their investment plans. Capital investment should see the fastest rise over the next 12 months.

The confidence of businesses in the South West has improved considerably in Q3 2021, with the index rising to its highest level (+46.0) in the region since the survey began in 2004. This is broadly in line with the UK average. The sharp uptake in vaccines over recent months and gradual reopening of the economy are likely to be the main factors lifting sentiment. The latter has also fuelled expectations of a sharp rebound in economic activity and sales in the second half of 2021 and into 2022.

Domestic sales, exports growth and customer demand as a challenge

Over the past 12 months businesses have seen both exports and domestic sales marginally rise, by 0.6% and 0.2% respectively. While conditions were very challenging for businesses during 2020 and early 2021, in recent months economic activity has picked up. The net effect is that sales levels are broadly back to where they were before the pandemic. For the year ahead, companies in the South West are very optimistic in their outlook. They have the strongest projection for export growth (5.3%) across the UK. And domestic sales (8.6%) growth is expected to outperform all but one region (the East Midlands) in the year ahead.

Against that backdrop, customer demand is less widely cited as a growing challenge than in previous quarters. 32% of companies now report this issue in Q3 2021, compared to its pandemic peak of 49% in Q4 2020.

Labour market

Associated with strong demand conditions, employee numbers are expected to rise by 3.8%, following year-on-year contractions in each of the last four quarters. This is the strongest projection across the UK and if achieved would be the sharpest increase in the region since the survey began. As staff levels rise, so too should average total salaries. Businesses plan to raise these by 2.4%, following very muted growth during the pandemic.

Business challenges

Despite the rise in confidence many challenges remain, particularly in the labour market. The percentages of businesses citing staff turnover (25%) and the availability of non-management skills (19%) as growing problems have risen markedly from recent quarters. Some of this may reflect the reluctance of some former workers to re-enter the labour force as coronavirus uncertainty remains. This is likely to have made it more difficult for companies to find suitable candidates to fill roles.  Beyond the labour market concerns, regulatory requirements are more widely cited than any other challenge. 44% of businesses cite this in Q3 2021, continuing the upward trend of recent quarters. COVID-induced restrictions are likely to be part of the explanation here, as well as difficulties in adjusting to the new UK-EU regulatory and logistical frameworks in the wake of Brexit.

Rising demand and ongoing coronavirus restrictions have hindered the ability of some companies to service markets. Linked to this, transport problems are a growing challenge for 29%, a slightly higher rate than nationally. Shortages in HGV drivers is part of the issue, which is likely to have slowed down operations and delivery rates.

Input and selling prices

Supply shortages and transport disruptions are probable reasons behind the uptick in input price inflation. Over the last 12 months input costs increased by 1.5%, and companies forecast a further 2.2% rise in the coming year. However, companies plan to match this with a 2.2% increase in selling prices, after restricting price rises during the pandemic. But although costs are rising, selling price gains and strong growth in sales should be sufficient to support an expected 8.1% increase in profits. This would be comfortably the fastest rise seen in the region since the survey began.

Investment

As demand rebounds and the financial positions of companies strengthen, investment rates should return to more familiar pre-pandemic norms. Both Research & Development budgets and capital investment are set to rise by 2.4% in the year ahead, after seeing very little growth during the pandemic. Growth in capital spending will partly stem from mounting capacity constraints, as businesses try to meet the surge in demand.