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ICAEW Business Confidence Monitor (BCM): Wales

Q2 2021: Sentiment buoyed by prospect of a strong rebound in sales

  • Both domestic sales and exports have fallen over the past year, with the latter contracting at a markedly sharper rate than the UK as a whole.
  • Profits are down and customer demand remains a widespread growing concern.
  • Although sales have been weak, employment levels have remained stable largely due to the government’s furlough scheme. 
  • COVID-19 restrictions and Brexit disruptions have brought transport problems to the fore, and regulatory requirements are a widely reported challenge. 
  • However, mass vaccinations and the likelihood of a strong upturn in sales have pushed Wales’ Business Confidence Index to its highest level in over a decade. 
  • On the back of strong sales projections, businesses also plan to begin hiring again. Investment in capital and R&D should also increase significantly.

The Confidence Index for Welsh businesses has climbed to its highest level since the third quarter of 2014, at +38.6. This doubtless reflects the positive developments relating to the distribution of coronavirus vaccines and, consequently, the prospect of a strong recovery in economic activity in 2021 and into 2022, as containment measures are retracted across Wales.

Domestic sales, exports, customer demand as a challenge, and spare capacity 

Looking backwards, Welsh businesses have experienced very difficult sales conditions over the past year. For most parts of the UK, businesses have suffered much sharper falls in domestic markets than international markets. However, for Welsh businesses the reverse is true. Exports are 2.0% lower than their level from a year ago, a considerably bigger drop than the UK average. This is the biggest contraction in Wales since the survey began in 2004. Domestic sales fell at the more modest rate of 0.8% in Q2 2021. Associated with this, 61% of businesses are operating below capacity in Q2 2021, comparing unfavourably with the UK average of 49%.

Reflecting the weakness in sales performance, customer demand remains one of the most widely reported growing challenges for Welsh businesses. In the 12 months to Q2 2021, 34% of businesses cite this as a more pressing issue, compared with 22% in the last survey period before the pandemic (Q2 2020).

Employment

Although sales have fallen, businesses in Wales have kept employee levels broadly the same (up just 0.1%) over the last year, helped by the Coronavirus Job Retention Scheme. The extension of the scheme into the latter part of 2021 should limit job losses, at least temporarily.

Profits growth, labour costs and input prices

The declines in sales have driven down profits, which contracted by 1.6% in the year to Q2 2021.The fall here would probably have been deeper if not for input price inflation easing to 1.1%, following a rise of 1.7% in the previous year to Q2 2020. 

Investment 

Against a backdrop of falling profits and mounting challenges, businesses have restricted their investment spending over the past year. The level of capital investment is broadly the same as in the year to Q2 2020, while Research & Development (R&D) budgets have been cut (0.6%) for the first time in a decade.

Business challenges

Despite the rise in confidence, many global uncertainties and challenges remain.  At home, the proportion of businesses citing transport problems as a growing source of difficulty has surged over the past year to its highest ever rate, from 16% to 30%. Recurring periods of lockdown in Wales, and internationally, have created logistical challenges for businesses, which have impacted on companies’ ability to service markets. An added obstacle has been new customs and port controls following Brexit, something that many Welsh exporters are likely to have been very sensitive to due to their higher-than-average reliance on the EU market. Regulatory requirements are also once again the most widespread concern for businesses, with over a third of companies reporting these in Q2 2021.

Prospects for the next 12 months

Although immediate conditions are difficult, companies are clearly deriving confidence from the prospect of a sharp economic rebound from the pandemic, both domestically and internationally, over the next 12 months. 

Businesses are hopeful that domestic sales will rise by 7.4%. If achieved, this would be a record high for Wales. Export growth is also set to improve, although at a more modest 2.3%, reflecting the likelihood that, because of differences in vaccine roll-out rates, the rebound in the UK economy will be stronger than in most European economies. As demand returns, companies also plan to increase their employment levels by 3%, a markedly faster pace compared to last year. In addition, profits are expected to increase at a near-record high over the next 12 months, at 6.8%. 
All forms of investment spending are set to increase over the next year. Growth will be fastest in capital investment, which should rise by 3.3%. R&D budgets growth will be marginally slower, at 2.3%.