ICAEW Business Confidence Monitor (BCM): West Midlands
Q2 2021: West Midlands’ Business Confidence Index reaches its highest ever level
- The past year has been extremely painful for businesses in the region, with both domestic sales and exports falling at faster rates than elsewhere.
- As a result, businesses have suffered the deepest fall in profits since the survey began.
- Companies have also reduced their staff levels, although the government’s furlough scheme has helped to limit job losses.
- Customer demand remains a major challenge, while regulatory challenges and transport problems are more widespread than in any other part of the UK.
- However, the Business Confidence Index has risen to its highest ever level, reflecting expectations of a return to more normal economic conditions.
- Businesses also forecast sharp rebounds in sales and profits over the next year, as pent-up demand is released. In turn, employment levels should rise.
- Supported by stronger profits, and possible capacity constraints as demand recovers, investment is expected to pick up after being cut during the pandemic.
After enduring a tough past year, the large majority of businesses in the West Midlands now expect conditions to improve in the year ahead. The region’s Business Confidence Index has risen to its highest ever level in Q2 2021, at +52.1. This is also the highest level across the UK. Clearly, sentiment has been buoyed by expectations of a sharp rebound in economic growth as the vaccine roll-out continues, and as the region follows the roadmap out of lockdown.
Domestic sales and exports growth, and customer demand as a challenge
Businesses experienced a more difficult 2020 than in perhaps any other region. The West Midlands’ large automotive and consumer durables sectors were particularly exposed to the decline in demand during the year, and the declines in overall exports (2.5%) and domestic sales (3.5%) were deeper in the West Midlands than in any other region. The fall in domestic sales was also the sharpest on record, while in only one other period (Q4 2020) was the year-on-year decline in exports steeper.
Given the weakness of sales performance, customer demand continues to be among the most widespread growing challenges for businesses: 42% of companies report this in Q2 2021, slightly above the UK average.
In response to the large falls in sales, businesses have reduced their headcounts by 1.6%. This is notably weaker than the UK average, with only businesses in the East Midlands reporting a deeper fall over the past year. However, when placed in the context of the scale of the output shock, and the declines seen during the global financial crisis, the fall in employment looks somewhat modest. The government’s furlough scheme has helped to cushion the labour market hit, with the region having one of the highest rates of furloughed workers across the UK during the first wave of coronavirus.
The weakness in sales hurt profits, which are 4.8% lower than their level from a year ago. This is the biggest contraction in the region since the survey began in 2004, and is the second weakest rate across the UK, behind the East Midlands.
The uncertainty of the past year, coupled with declining sales and profits, has resulted in businesses cutting back their investment spending. In the year to Q2 2021 capital investment is down by 1.4%, comparing unfavourably with the 0.3% fall nationally. Research & Development (R&D) budgets are 0.7% lower than they were a year ago, the joint sharpest contraction along with Scotland, across the UK. This is particularly concerning given the strategic importance of R&D spending within the West Midlands’ automotive sector.
As well as demand concerns, businesses are dealing with a range of other challenges. The most widespread issues are regulatory requirements, with 47% of companies citing these as a growing challenge. This is the highest rate across the UK. Although a Brexit trade deal has been established, many companies in the region, especially within manufacturing, are likely to be facing challenges in adapting their operations to new customs and regulatory standards.
Similarly, the proportion of companies reporting transport problems as a more pressing issue (41%) ranks highest across the UK. The most likely explanations for this are shortages in air-freight and road-freight capacity as businesses prepare for the reopening of the economy. In addition, business operations are probably being impeded by delays at ports due to the new Brexit barriers.
Prospects for the next 12 months
Despite the hardships of the past year and the clear uncertainties that remain, businesses are optimistic in their outlook for the year ahead. Clearly, recovery prospects are being bolstered by the rapid vaccination roll-out and advances of the government’s roadmap for reopening the economy. Growth in both domestic sales (7.9%) and exports (4.0%) should outpace the national figure, with a release of pent-up demand set to drive an expansion in the region’s manufacturing sector. As businesses attempt to meet demand, employee levels are projected to rise by 2.4%. Stronger sales performance is also expected to support an increase in profits of 8.7%, which, if it materialises, will be comfortably the fastest profits growth ever seen in the region. Supported by higher profits, and by potential capacity constraints as demand returns, investment rates should pick up. Capital investment is forecast to expand by 3.2%, while R&D budgets are projected to be 1.7% higher over the next 12 months.