The latest Business Confidence Monitor (BCM) shows business confidence falling further. Difficult economic conditions continue, though there has been some easing in the political turmoil of the previous period, which seriously unsettled financial markets. As a result, some economic stability has been restored, even though September’s events have resulted in higher interest rates, taxes and government borrowing, and lower government spending. But the global economic background continues to look very challenging.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period 17 October to 16 December 2022.
- The Business Confidence Index for the South West still sits in negative territory but has improved compared to the previous survey period, in contrast to the UK trend.
- Domestic sales growth has outperformed the UK average, and this is expected to continue in the year ahead. Conversely, export growth has been weak, but is forecast to strengthen.
- Customer demand is a widespread issue, possibly due to the weak outturn for exports. Issues around the availability of skills and staff turnover are easing.
- Tighter financial conditions faced by businesses and customers may help to explain why late payments are now a prominent challenge. Government support is also a widely cited challenge by companies.
- Cost pressures for businesses are very strong, with salary growth well above the historical average and input price inflation faster than at any time since the start of the survey.
- Encouragingly, businesses in the South West are planning to increase spending faster than the national average in terms of both capital investment and Research & Development (R&D) budgets.
Business confidence in the South West
The Business Confidence Index for the South West is in negative territory and some way below the region’s historical average, but at -13.0 it is above the UK average of -23.4. Along with Wales, the South West is one of only two regions where the index has improved from the previous survey period.
Domestic sales and exports growth
Domestic sales are rising sharply. A year-on-year increase of 6.6% is more than twice the historical average for the region and only businesses in the East Midlands report a faster outturn. Companies also anticipate a further 6.2% increase over the next 12 months. With the exception of London, this is the strongest outlook across the UK, and probably explains the modest improvement in confidence.
By comparison, export growth has been slower at just 2.8%. Only companies in the North East and North West report weaker outturns. This may help to explain why the proportion of businesses being challenged by customer demand (39%) is higher than in any other UK nation or region. However, businesses expect to see an acceleration of growth in exports over the next 12 months to 4.5%, which is in line with the national forecast.
Labour market challenges are easing markedly for businesses in the South West. Indeed, the proportions of companies reporting staff turnover and the availability of non-management skills as growing sources of difficulty have fallen sharply to 31% and 25% respectively. Both are the lowest across the UK, and the same is true for the availability of management skills at 22%.
As supply-side challenges ease for businesses in the South West, other problems have risen in prominence. Late payments are a growing source of difficulty for 24% of companies, the second highest rate across the UK, behind only the North West. The tighter financial conditions that both businesses and customers face are likely to be a major factor here. Possibly linked to this, government support is now a more widespread problem (17%) than at any point since the start of the survey in 2004.
Against a backdrop of easing recruitment difficulties, average total salaries are rising (3.5%) at the slowest pace across the UK, along with the North East. That said, the rate of increase is still some way above the region’s historical norms, largely because of high inflation rates and the subsequent upwards pressures this is having on nominal wage claims. Businesses plan a slightly faster increase of 4.2% in salaries over the year ahead, only marginally outpacing the UK outlook. Staff levels increased by 2.6%, nearly twice the historical average, but businesses plan to slow workforce expansion to 2.0% over the next 12 months.
Input and selling prices, and profits growth
Businesses continue to contend with significant input cost pressures, reflecting ongoing supply-chain problems as well as heightened commodity and energy prices due to the Ukraine-Russia war. Annual input price inflation has been exhibiting a clear upwards trend through 2022, and now stands at 6.1%, the fastest increase since the start of the survey in 2004. A more moderate rise of 5.0% is forecast for the next 12 months, although this is still well above the region’s historical average.
In response to intensifying cost pressures, companies are lifting selling prices at a record rate for the region. The 4.6% rise is the joint fastest rate (along with Yorkshire & Humberside) in the UK, and the planned 3.9% increase is expected to outpace all other UK nations and regions.
The net effect of higher prices, costs and sales has been growth in profits of 3.8%. Although this is weaker than the national average of 4.3%, businesses in the South West forecast a 4.7% rise in profits over the next year which, if achieved, would be the strongest outturn across the UK.
Encouragingly, over the past year both capital investment and R&D budgets have improved, compared with the height of the pandemic. With 2.9% and 2.5% growth respectively, both forms of spending have increased at faster rates than the region’s historical averages. And over the year ahead, businesses in the region plan to accelerate R&D budget growth to 3.0%, which would be faster than elsewhere in the UK, and is in stark contrast to UK-wide expectations where growth is set to slow. Compared to the current rate, capital investment growth is, however, set to soften to 2.0%, although this is still stronger than the UK outlook.