ICAEW Business Confidence Monitor (BCM): Wales
Q3 2021: Strong sales outlook helps lift Welsh business confidence further.
- Welsh businesses anticipate very strong growth in domestic sales in the year ahead, with confidence reaching its highest level.
- Export growth is predicted to be more modest than domestic sales, but nonetheless should markedly improve on recent quarters.
- Businesses plan to increase their headcounts, which partly explains why average total salaries are projected to rise.
- Input and selling prices have picked up and are forecast to continue to do so over next the next 12 months, returning to pre-pandemic norms.
- Skills availability and staff turnover have become much more widespread growing challenges and transport problems remain elevated.
- Businesses have also upgraded their investment plans, on the back of rising demand, growing capacity constraints and a stronger financial position.
The Confidence Index for Wales has climbed to its highest ever level in Q3 2021 since the start of the survey in 2004, at +47.1. This is likely to be underpinned by expectations of a strong recovery in economic activity, as the Welsh Government continues to ease restrictive measures, with vaccines more widely distributed, and demand rises across the UK and globally.
Domestic sales, exports and customer demand as a challenge
For the last 12 months, businesses report rises in domestic sales and exports of 0.9% and 1.0% respectively. This reflects gradual increases in demand over recent months following the severe challenges that businesses faced during 2020. Looking ahead, Welsh companies expect the pace to pick up significantly, especially for domestic sales, which they project will rise by 7.9% over the year ahead. This is a stronger forecast than for the UK as a whole. If achieved, it would be the sharpest rise in Wales since the survey began. Growth in exports is also set to improve, albeit at the slower pace of 2.7%. Wales is one of the UK’s most export-focused regions, so the number here is particularly important.
Reflecting these expectations for sales performance, the proportion of businesses reporting customer demand as a growing challenge has eased. Indeed, only 31% of companies cite this in Q3 2021, compared to its pandemic peak of 50% in the final quarter of 2020.
Throughout the pandemic, the hits to the labour market have been relatively modest when compared to the declines in output, thanks to the Coronavirus Job Retention Scheme in limiting the number of job losses. However, as demand growth picks up, businesses intend to increase employee numbers sharply. A year-on-year rise of 2.6% is forecast for the next 12 months, a rate that would comfortably exceed the historical average for Wales (1.0%). Higher employment levels should also provide the basis for a 2.2% rise in average total salaries, which would push their growth back to pre-pandemic norms.
Input and selling prices
As well as rising labour costs, input prices are also increasing for Welsh businesses. These are already 1.8% higher than a year ago, and businesses anticipate a further rise of 1.7% over the next 12 months. Part of this may reflect the exposure of Wales’ important manufacturing sector to current supply shortages and bottlenecks, as global demand rebounds. As a result, businesses expect to increase selling prices at a rate (1.3%) similar to those seen before the pandemic.
As the economy expands, businesses are being increasingly challenged in the labour market, with staff turnover and the availability of non-management skills both becoming more widespread. The former is a growing challenge for 25% of companies while the latter is reported by 20%. Both are more than double the rates seen in the final quarter of 2020.
The rate of incidence of rising transport problems (27%) is also considerably higher than the historical norm for Wales. The logistical challenges to transport and limited freight capacity as the economy expands are probable reasons for this. Another possible obstacle is Brexit: Welsh businesses are among the most reliant in the UK on the EU market for exports, and so may have been particularly impacted by new trading regulations and controls.
Spare capacity, investment and profits
There has been a decline in the proportion of businesses operating below capacity, from 61% in the final quarter of 2020 to 48% in Q3 2021. As the recovery in sales gathers momentum, businesses will need to expand their capital stock in order to meet demand. Consequently, Welsh businesses plan to increase their spending on capital assets by 2.8% in the year to Q3 2022, after barely any growth over the past 12 months. Research & Development budgets and staff development budgets are also expected to rise by 1.3% and 2.6% respectively, after being constrained during the pandemic. This improvement in investment rates should be supported by an expected rise in profits of 7.0% which, if achieved, is set to be the sharpest increase in over five years.