ICAEW Business Confidence Monitor (BCM): West Midlands
Q1 2019: Businesses confidence in the West Midlands has weakened markedly
Business confidence is in firmly negative territory in Q1 2019. That can be explained by Brexit-related concerns, slower sales and profits growth and growing worries over customer demand. These factors are also key to explaining why businesses are downbeat about planned increases in investment over the next year.
Business confidence trend in West Midlands
Business sentiment in the West Midlands is among the weakest in the UK. At -24.9, the Confidence Index is at its lowest since the financial crisis. Brexit is likely to be weighing heavily on companies, especially for the region’s large manufacturing sector. Many of these businesses are deeply embedded in pan-European supply chains, so a no-deal Brexit might be particularly disruptive to them.
Domestic sales and exports
Along with concerns over Brexit, businesses in the West Midlands are also reporting more subdued sales growth than a year ago. Exports are expanding by just 1.7%, the joint lowest rate in the UK. And the increase in domestic sales has been exhibiting a clear downwards trend in recent quarters, with a 2.8% year-on-year rise in Q1 2019 compared to 4.3% a year earlier.
Selling prices, costs and profits
Given sluggish sales, companies are struggling to significantly increase selling prices, with a rise of just 1.4% over the last year. This is considerably slower than both input price inflation (2.4%) and total wage increases (2.7%). Combined, these factors are hindering profits growth, which has declined markedly.
In line with lower sales and profit growth, 38% of companies are citing customer demand and marketplace competition as growing concerns, both up from a year ago. Concern over demand may be related to the economic slowdown in the Chinese economy, an important market for some of the region’s larger manufacturers. Furthermore, 31% of businesses are becoming increasingly concerned about staff turnover, and the same proportion for availability of non-management skills. Brexit concerns may also be evident in the steady rise over the past year in the proportion of companies (10% in Q1 2019) reporting growing concern over their ability to expand into new areas.
The pace of investment growth varies across the different types of spending. Companies are increasing staff development budgets at a faster rate (2.6%) than in the year to Q1 2018, reflecting mounting concerns over the retention and supply of labour. However, with weaker demand conditions, capital investment growth (1.8%) is more modest than a year ago.
Prospects for the next 12 months
Businesses anticipate that growth in exports (3.8%), domestic sales (3.5%) and profits (2.8%) will all improve. However, the overall weakness of confidence appears to be translating into investment caution. Companies do not plan to increase Research & Development spending from its current level and are also forecasting moderations in the growth in capital investment and staff development budgets, to 1.5% and 1.7% respectively.