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Economic Insight

ICAEW Business Confidence Monitor (BCM): Wales

Business confidence eases but remains firmly positive

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.

  • Wales’ Business Confidence Index continues to move down towards pre-pandemic territory, but is still above the UK average.
  • Welsh businesses achieved faster domestic sales and exports growth than elsewhere in the UK over the last year. Strong growth is also expected in the 12 months ahead.
  • However, companies are dealing with a number of challenges: staff turnover and the availability of skills continue to be widespread issues.
  • The tax burden is also felt to be a more prominent growing challenge in Wales than in any other part of the UK.
  • Labour and input costs are rising sharply. Nowhere in the UK is input price inflation higher.
  • Businesses are increasing their spending on capital and Research & Development, with growth in the latter comfortably outpacing the UK average.

Business confidence in Wales

The Welsh Business Confidence Index stands at +22.3 in Q2 2022, a slightly higher rate than the UK average. That said, it marks the third successive quarter where the index has weakened. While Welsh companies are currently operating in a high sales growth environment, it is clear that they are aware of the challenges they face, especially in terms of supply-side problems, and the potential adverse impacts this could have on the growth outlook. 

Domestic sales and exports growth

Despite a weakening of business sentiment, both domestic sales (8.9%) and exports (5.2%) increased at faster rates than elsewhere in the UK. The pace of growth in the latter is likely to be a particular source of encouragement given that Wales is one of the most export-intensive parts of the UK. In the year ahead, companies expect domestic sales and exports growth to moderate slightly.

Business challenges

Against a backdrop of healthy sales growth, customer demand and marketplace competition have now become relatively minor issues for businesses. But as these challenges ease, supply-side problems have risen in prominence. Indeed, the proportion of companies citing staff turnover as a growing challenge is higher than in any other UK nation or region. At 52%, it is also the highest rate in Wales since the survey began in 2004. The availability of both non-management and management skills also continues to remain well above historical norms. 

Over recent quarters, transport problems were a very widespread growing challenge for Welsh businesses, particularly within the manufacturing sector. Labour shortages, especially in relation to HGV drivers, and Brexit-related frictions were factors behind this. And while this challenge has eased from the record highs of the last two quarters, it still remains elevated. Indeed, 28% of companies cite the challenge in Q2 2022, which is still double the historical average for Wales. 

Another source of concern is the tax burden. Over the survey’s history this has been a minor issue for businesses. However, in Q2 2022, 28% of businesses are being increasingly challenged in this area, the highest rate of incidence across all UK nations and regions. 

Labour market

The difficulties that businesses continue to face in terms of staff recruitment and skills shortages help to explain why annual average total salary growth now stands at 3.5% in Q2 2022. This is the sharpest increase in over 15 years. A slightly stronger 3.7% rise is expected in the year to Q2 2023. 

However, businesses do not expect existing labour market frictions to impede employment growth. Employee numbers are forecast to be 4.2% higher in Q2 2023 than in the current quarter. If achieved, this would be the fastest rate of growth in Wales since the survey began.

Input, selling prices and profits growth

Supply-side disruptions, as well as sharp rises in global commodity prices, means that businesses are dealing with mounting input cost pressures, particularly in Wales’s large manufacturing sector. In the year to Q2 2022 input price inflation was 4.5%. Together with Northern England and Yorkshire & Humber, this was the sharpest rise across the UK. A similarly strong rise is forecast for the next 12 months. 

Crucially, businesses are letting these cost pressures feed through to selling prices. Companies plan a 2.9% increase over the coming 12 months, which would be a record for Wales since the survey began in 2004. The fact that companies are operating in a high sales growth environment, together with higher selling prices, means that the cost rises are having a limited impact on company profit margins at the moment. Profits were up by 9.1% year-on-year in Q2 2022. A slower rise is forecast for the next year.

Investment

Investment rates have improved. Both capital investment and Research & Development (R&D) budgets increased at faster rates than their respective UK averages. For the latter, growth was only marginally faster in one other UK region—the South West. Over the next year, Welsh businesses also have stronger outlooks for capital spending and R&D budgets than their respective UK averages.