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ICAEW Business Confidence Monitor (BCM): West Midlands

Q3 2021: West Midlands’ Business Confidence Index reaches record level.

  • The West Midlands’ Business Confidence Index is the highest across the UK.
  • Businesses are deriving confidence from their expectations of sharp rebounds in sales in the year ahead, after a difficult past 12 months. 
  • Employment is expected to pick up as demand returns. Salary growth should also move back to more familiar pre-pandemic territory.
  • But as labour market conditions tighten, both staff turnover and the availability of non-management skills are becoming more prominent issues for businesses.
  • Transport problems are also becoming a more widespread challenge, no doubt reflecting shortages of transport capacity as the economy recovers.
  • Along with higher wage costs, input prices have picked up and will rise further in the year ahead, as companies deal with supply shortages and bottlenecks.
  • And with fewer businesses reporting spare capacity, investment rates are set to improve over the next 12 months. 

Following a challenging past year, the West Midlands’ Business Confidence Index has risen to its highest-ever level in Q3 2021 since the survey launched in 2004, at +55.8. This makes the West Midlands the most confident region across the UK. The improvement in sentiment is largely underpinned by expectations of a sharp recovery in economic activity in the year ahead. 

Domestic sales and exports growth, and customer demand as a challenge

Businesses in the West Midlands were particularly challenged during the early part of the pandemic, with the region’s large consumer durables and automotive sectors suffering from especially weak demand in both domestic and international markets. However, the region’s economy turned around in the later months of 2020 and the first half of 2021, so that in the current quarter domestic sales are only 0.6% lower than their level of a year ago, while exports are down by just 1.4%. Businesses expect this recovery to gain further momentum over the year ahead, as pent-up demand is released in the region. Domestic sales are projected to expand by 7.1%, which, if achieved, will be the fastest growth seen in the West Midlands since the survey began. And exports are forecast to rise at their fastest rate (4.8%) in a decade.

Reflecting this outlook for sales, the proportion of businesses citing customer demand as a growing source of difficulty has eased from its pandemic peak of 50% in the final quarter of 2020 to 35% in Q3 2021.  

Labour market

Over the past year, businesses have reduced their employee numbers (-2.2%) at a sharper rate than elsewhere in the UK. That said, as demand recovers in the 12 months ahead, companies intend to expand their staff levels by 2.8%, which if achieved will be the fastest increase since mid-2018. And as the labour market recovers, they expect a pick-up in average total salaries of 2.3%, signalling a return to more familiar pre-pandemic rates of increase. 

Business challenges

These expectations of higher wage costs are also consistent with the growing labour market challenges that businesses are facing. Both staff turnover and the availability of non-management skills are now more widespread concerns than during the pandemic, as companies struggle to fill vacancies to meet the upsurge in demand. 

Another rising area of difficulty is transport problems, with the region’s large and export-intensive manufacturing sector particularly challenged in this area. Demand for space on vehicles and aircraft is clearly rising sharply, and supply shortages are apparent across the transport sector ‒ possibly complicated by Brexit. On the positive, side problems with late payments are easing. The proportion of companies reporting these as a growing concern has fallen from a pandemic peak of 34% at the end of 2020 to 16% in Q3 2021. 

Input and selling prices and profits

Over the past year there has been a pick-up in input prices, which are 1.5% higher in the current quarter than a year ago. Companies expect this to continue, with another 1.9% increase in the 12 months ahead. Supply shortages and bottlenecks in the region’s highly inter-connected manufacturing sector are likely to be part of the story here. Businesses also intend to increase their selling prices at a faster rate over the year ahead than in the past 12 months, with a 1.6% rise projected. The combination of a sharp rebound in sales and selling price gains should be more than sufficient to offset any damage to profits from increases in labour and input costs. Indeed, profits are set to grow at their fastest pace (6.6%) in over a decade over the coming 12 months. 

Spare capacity and investment

As companies face rising demand, so the proportion of businesses operating below capacity has fallen to a near-record low (48%) in the region. And with strong growth in sales expected over the next 12 months, companies have upgraded their investment plans. Capital investment is projected to rise by 3.1%, after seeing no level change over the past 12 months. And Research & Development budgets will increase by 1.6%, a marginally faster pace than over the last year. Staff development budgets are also expected to increase, at a broadly similar rate to the expected growth in employee numbers.