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Economic Insight

ICAEW Business Confidence Monitor (BCM): South West

Business Confidence Index strengthens slightly

Q2 2022: The latest Business Confidence Monitor (BCM) shows business sentiment weakening across most of the UK. As economic conditions tighten, businesses are facing significant challenges, particularly on the supply-side, that could hinder future growth. Input costs are increasing sharply, while salaries are rising in response to recruitment difficulties and labour shortages. This is despite companies experiencing strong sales growth as they continue to recover from the pandemic.

The results are based on telephone interviews with ICAEW Chartered Accountants that took place between 17 January and 21 April 2022.

  • The South West is one of the few parts of the UK where the Business Confidence Index has slightly improved since the last quarter.
  • Underpinning this rise in the index is companies’ anticipation of a strong growth in domestic sales over the next year. Export growth is also forecast to outpace the region’s historical average.
  • Businesses continue to deal with challenges surrounding the labour market. Staff turnover and the availability of non-management skills are currently the most prominent growing challenges in the region.
  • Supply-side problems probably help to explain why annual input price inflation and average total wage growth reached their highest rates in over a decade. Selling prices are also rising sharply.
  • Investment has improved. Growth in Research & Development budgets outpaced other regions in the UK over the past year. Further growth is planned in the year to Q2 2023.

Business confidence in the South West

Despite falls nationally, the South West’s Business Confidence Index has improved slightly in Q2 2022, to +22.9. Along with the East Midlands, it is the only region where that has happened. The index is now marginally above the UK average. The sales environment has improved for businesses in the region, although companies continue to experience supply-side challenges.

Domestic sales and exports growth

Following a difficult trading period during the pandemic, domestic sales growth markedly improved in the year to Q2 2022, rising by 5.3%. And after muted rises in recent quarters, export growth improved to 2.7%. Businesses expect a marked increase in domestic sales over the next year, while export growth is forecast to outpace the region’s historical average.

Business challenges

Against that sales backdrop, companies feel less challenged than they were by customer demand and marketplace competition. Instead, supply-side issues have become more prominent, with 42% of businesses facing difficulties with staff turnover and 39% citing the availability of non-management skills as a growing problem. This compares with just 10% and 8% respectively in the same quarter a year ago. This is also the highest proportion of companies reporting staff turnover as a growing challenge since the survey began in 2004. 

Transport problems are widespread in the region, with 28% of businesses reporting this as a growing issue. A shortage of HGV drivers has caused disruption to operations and is a possible reason. And while this challenge has eased since the record high in Q4 2021, it remains much higher than the region’s historical average. 

Labour market

The challenges faced by businesses in terms of staff recruitment and skills shortages offer a reason why annual average total salary growth reached 3.0% in Q2 2022. This is the highest increase since Q4 2008. Rises are expected to continue at a similar pace in the year ahead. However, employment numbers are rising fairly slowly, up by only 2.3% on a year earlier, with only businesses in the East Midlands reporting a slower rate of growth. However, staff levels are expected to rise at the slightly sharper rate of 3.2% over the next year, suggesting that companies do not expect existing labour market frictions to impede employment plans. 

Input and selling prices

A rise in global commodity prices and widespread supply-side disruptions have led to strong upward pressure on input costs. At 4.2%, this quarter’s year-on-year increase is the highest since Q1 2009. An even stronger rise of 4.7% is expected in the next 12 months. 

Businesses are letting some of these costs feed through to customers. Selling prices rose by 2.9%, the fastest rate since mid-2007. Only businesses in Yorkshire & Humber have increased prices at a faster rate in the year to Q2 2022. But the combination of higher selling prices and increasing sales has helped to lift profits by 3.9% over the past year, with a stronger rise expected for the year ahead. If achieved, this would be the fastest rate of growth in seven years.

Investment and spare capacity

With increasing profits and stronger demand, businesses have increased investment. Capital investment and Research & Development (R&D) budgets increased at broadly similar rates over the past 12 months, at 2.8% and 3.1% respectively. The latter was the fastest increase across the UK. For both areas of investment, similar rates are expected in the year ahead.