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ICAEW Business Confidence Monitor (BCM): Wales

Q1 2019: Slower sales combined with Brexit concerns are hindering investment growth.

Welsh business confidence is markedly weaker in Q1 2019. Against a backdrop of Brexit uncertainty, there are several other challenges facing businesses in Wales, with labour market conditions a notable source of difficulty. Companies are also reporting slower sales and profits growth for the past year. Linked to this, investment growth is already subdued, and further moderations are projected for the year ahead.

Business confidence trend in Wales

Confidence across Welsh companies is holding up better than at the UK level, but it is in negative territory for the second quarter in a row. Indeed, sentiment has slightly weakened to -6.8 in Q4 2018. Brexit is a likely cause, although probably not the only one.

Business challenges

Among several growing challenges, labour market factors are moving towards the fore. A substantial minority (38%) of Welsh companies say that the availability of non-management skills is a source of growing difficulty, while almost a quarter (24%) cite the availability of management skills and staff turnover as growing concerns. These patterns may reflect the tightening in the Welsh labour market, with the latest Office for National Statistics data showing a fall in the unemployment rate to 3.8% in the three months to September. 

Domestic sales and exports

Growing issues with labour availability may, in part, reflect the fact that Welsh companies are experiencing continuing growth in domestic sales. At 3.7% year on year in Q4 2018, the rate of expansion in these is unchanged from Q4 2017. That said, exports are slowing to 2.6% in the current quarter, following fairly robust growth of 4.7% in the year up to Q4 2017. This could be a factor behind the weakness in overall confidence, given that Wales is one of the more export-orientated parts of the UK. The export slowdown may also partly explain why a growing proportion of companies cite marketplace competition as an increasing challenge. 

Profits, selling prices and input costs

The expansion of domestic sales is not translating into profits growth, which has slipped to 2.5% in Q4 2018, significantly down from the 5.2% achieved last year, and also below the UK average. Businesses are also struggling to achieve significant increases in selling prices in Q4 2018. At 1.4% these continue to lag behind input price inflation (2.5%), and are consequently squeezing profits.

Investment

The overall impact of these developments is that investment by Welsh businesses is slowing. Capital investment and staff development budgets are up by only 1.6% and 1.0% year on year: both significantly lower than the 2.7% and 2.5% increases of a year ago. And looking ahead, little change is expected. Growth in capital investment is set to remain the same, while businesses expect to increase their Research & Development expenditure by only 1.2%.  

Prospects for the next 12 months

That caution over expected investment growth is despite companies projecting improvements in exports and profits growth. Companies anticipate that these will increase by 4.2% and 2.8% respectively in the next 12 months. But domestic sales growth is forecast to slow slightly to 3.3%, and that could be having a larger impact on investment intentions.