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ICAEW Business Confidence Monitor (BCM): South West

Q2 2021: Business Confidence Index surges to near-record high

  • South West companies suffered sharp falls in activity over the last year, particularly in domestic sales. 
  • Profit levels have sunk. Reflecting the difficult financial environment, late payments are a prominent challenge in the region. 
  • Employment has declined over the last year, although the cuts here would probably have been much deeper without the furlough scheme. 
  • Customer demand remains the most widespread challenge. Regulatory requirements and transport problems are also growing sources of difficulty. 
  • Even so, the Business Confidence Index has risen dramatically, largely due to the progress made in vaccine distributions and consequent expectations of a return to more normal trading conditions. 
  • Businesses forecast record growth for domestic sales in the year ahead, while exports may also expand sharply. This should push up employment levels. 
  • Profits should also markedly improve over the next year, providing a basis for much stronger investment rates.  

The Business Confidence Index has improved considerably in Q2 2021, rising to a near-record high of +34.1. While immediate business conditions remain very challenging, it is clear that sentiment has been lifted by the quick roll-out of vaccines. This has fuelled expectations of a sharp rebound in economic activity and sales in 2021 and into 2022.

Domestic sales, exports growth and customer demand as a challenge

The improvement in confidence reflects optimism for the year ahead. However, the past 12 months have been extremely difficult for companies in the South West, with domestic and international demand collapsing during the pandemic, and businesses also facing challenges in meeting even the reduced levels of demand. In the year to Q2 2021, domestic sales contracted by 2.7%, the sharpest fall in the region on record. This is also one percentage point weaker than the national decline of 1.7%. Exports are also down on a year ago, albeit at the slightly more modest rate of 0.8%. 
Against that backdrop, it is unsurprising that customer demand is the most widely cited growing challenge among businesses in the South West. In Q2 2021, 48% of companies are experiencing this, over 20 percentage points above the rate from a year ago and the second highest proportion across the UK, behind the East Midlands. 

Labour market

Associated with the falls in sales, businesses have cut their employee numbers. Over the past 12 months, employment has contracted by 1.1%. It is likely that the drop here would have been more severe without the government’s furlough scheme. For comparison, after the global financial crisis staff levels fell at the steeper rate of 2.2%.

Related to the weak demand environment, the proportions of companies reporting the availability of management (8%) and non-management skills (8%) as more pressing issues are well below their historical averages. 

Profits growth and late payments as a challenge

Sharp declines in sales have also impeded profits, which have fallen by 1.4% over the last year. Symptomatic of this challenging financial environment, late payments are a more pressing issue for 29% of companies, compared to just 15% a year ago.

Investment

With businesses enduring weak demand and a great deal of uncertainty, investment spending has been restricted. Capital investment rates have barely changed over the last 12 months, rising by a mere 0.1%.

Business challenges

Despite the rise in confidence, many uncertainties and challenges remain, including difficult conditions around the world and the course that the COVID-19 pandemic will take. Related to these underlying concerns, there are several growing challenges that businesses face in the region. While customer demand and late payments are prominent concerns, so too are regulatory requirements. A third of businesses cite this in Q2 2021, continuing the upward trend of recent quarters. COVID-related restrictions are likely to be a factor behind this, with difficulties in adapting to the new UK-EU trade agreement another possible reason. 

Containment measures, both domestically and internationally, have adversely impacted the ability of companies to operate and fulfil demand. With some parts of the South West geographically isolated, it is perhaps unsurprising that transport problems have risen sharply over the last year as a growing problem: 18% of companies report this issue in Q2 2021, compared to just 5% a year ago. 

Prospects for the next 12 months

Although it has been a tough year and challenges still persist, the South West’s Business Confidence Index has climbed to a near-record level in Q2 2021. This doubtless relates to the prospect of a rebound in sales as vaccines are distributed and lockdown measures ease. Some businesses in the region may also gain from a possible rise in domestic tourism this year, as international travel restrictions persist. Domestic sales (7.7%) and exports (4.4%) are both set to rise at sharper rates than nationally over the next 12 months. Growth in the former, if achieved, would be the fastest seen in the region since the survey began in 2004. As demand returns, companies also anticipate a 2.4% increase in employment. This improved sales environment should also help lift profits by 6.7%. In turn, this is likely to help companies increase capital spending (2.8%) at its fastest rate in over a decade.