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Economic Insight

ICAEW Business Confidence Monitor (BCM): West Midlands

Q3 2022: Business Confidence Index falls sharply into negative territory in the West Midlands

The latest Business Confidence Monitor (BCM) shows business confidence falling into negative territory across the UK, as companies face a cost of doing business crisis, alongside the cost of living crisis that consumers are facing.

The results are based on telephone interviews with ICAEW Chartered Accountants that took place between 25 April and 15 July 2022.

  • Confidence fell markedly for businesses in the West Midlands and is now in negative territory.
  • This is despite strong domestic sales performance, and the outlook for exports outpacing all other parts of the UK.
  • The weakening of business confidence clearly stems from widespread supply-side challenges.
  • Both staff turnover and the availability of skills are very widespread issues and help to explain why businesses are increasing average total salaries at the fastest pace since the start of the survey in 2004.
  • Regulatory requirements and transport problems also continue to pose a challenge for companies in the region.
  • Businesses also face higher input prices. In turn, they have increased selling prices sharply, with similarly strong gains expected over the next year.
  • Companies have increased their investment spending but plan to moderate growth across all forms over the next 12 months.

Business confidence in West Midlands

The Business Confidence Index for the West Midlands has fallen further from its peak in Q4 2021 and has now entered negative territory, at -8.1, in Q3 2022.

Domestic sales and exports

Although the Business Confidence Index has weakened, companies are still achieving robust sales growth of 6.9%, so only slightly lower than the record rate achieved in the previous quarter. Businesses in the region project a smaller rise in the year ahead, but, at 5.6%, this will be one of the fastest increases in the UK, if it is achieved.

In terms of exports, the 4.3% rise over the past 12 months is the strongest the region has seen since Q1 2013 and the second fastest rate of expansion across the UK, behind only Wales. Over the next 12 months, businesses in the region expect exports to expand by 5.0%, faster than anywhere else in the country.

Business challenges

While sales growth has been healthy, many challenges are clearly weighing heavily on business sentiment. Labour market challenges have especially come to the fore and are likely to be particularly apparent in the region’s large manufacturing base. In particular, the proportion of businesses being increasingly challenged by staff turnover is 44% in Q3 2022, making this the most prominent challenge in the region. And while the percentage of businesses reporting the availability of non-management skills (38%) has eased from its recent peak, it remains firmly above the region’s historical average. Strikingly, the proportion of businesses reporting the availability of management skills as a growing issue remains at an all-time high of 34% for the region.

These labour market challenges are all partially explained by growing demand for labour across the country, but have been worsened by the exit of some workers from the labour market during the pandemic, and probably also by labour market shortages caused by Brexit. The combination of these factors could adversely impact the ability of companies to meet sales expectations over the year ahead.

Regulatory requirements are the second most widespread issue for businesses in the region; 39% of businesses face difficulties in this area, which is in line with the national average. And despite falling in recent quarters, 31% of businesses still cite transport problems as a growing issue, which is twice the historical average for the region. This particularly reflects ongoing disruptions to the region’s complex supply-chain networks in manufacturing and distribution.

Labour market

Despite the challenges that businesses currently face in the labour market, the number of employees is 4.0% higher than its level a year ago. This increase is faster than the national average and the highest in the region since the survey began in 2004. At the same time, average salaries are growing at their fastest rate since the start of the survey (3.7%). Both employment growth and wages growth are expected to remain high over the next 12 months at 3.3% and 3.5% respectively, outpacing the national outlook in both respects. 

Input, selling prices and profits growth

In addition to rising labour costs, input prices are climbing substantially. As businesses struggle with the impacts of supply-side issues and a global surge in energy prices, annual input price inflation has reached 5.6%. This is the fastest pace for the region since the survey began in 2004 and faster than elsewhere in the country. Businesses expect these upward pressures on input prices to remain and price rises to continue at a broadly similar rate of 5.2% over the next 12 months. Only businesses in Wales project input costs rising faster.

In response to these increasing costs, as well as stronger sales growth, selling prices are also rising at a faster pace (3.6%) than ever before in the region, with businesses planning a further 3.5% rise in the 12 months ahead. Only businesses in Wales are implementing greater increases in their selling prices.  

Overall, the effect of rising sales and selling prices is that profits are rising at a near record pace, despite the cost increases. The 7.0% growth in the past 12 months is only marginally slower than the regional record in the previous quarter. Profit growth is, however, expected to moderate over the next 12 months, with businesses projecting a further 5.2% rise; but this outlook still outpaces the national average. 

Investment

Businesses have been able to achieve healthy increases in investment spending over the past year. Capital investment grew by 2.7% while Research & Development (R&D) budgets have grown 2.5%, meaning that both are currently increasing at faster rates than the historical averages for the region. Over the next 12 months, the pace of growth in capital investment and R&D budgets is, however, expected to moderate to 2.4% and 2.3% respectively.