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ICAEW Business Confidence Monitor (BCM): West Midlands

Q3 2019: Company confidence is negative, amid weak sales growth

Business confidence for the West Midlands remains negative in Q3 2019. Concerns over Brexit and global trade may be dampening sentiment, as well as the subdued sales growth of companies in the region. As a result, businesses are cautious about their investment spending for the next year.

Business Confidence in West Midlands

The West Midlands Confidence Index has now been below zero in each of the last four quarters and stands at -7.3 in Q3 2019. Brexit uncertainty remains a pertinent issue for the region given its large manufacturing sector, which may be vulnerable to a ‘no-deal’ Brexit. Difficult conditions in the wider global economy could also be damaging sentiment among exporters in the region. 

Domestic sales and exports

Muted sales growth may also be weighing heavily on business confidence. Exports contracted slightly by -0.1% in the year to Q3 2019, reflecting the impact of slowing global trade activity on the region’s economy. Domestic sales growth has also eased from 4.0% in Q3 2018 to 3.2% in the 12 months to this quarter. In line with sluggish sales conditions, 63% of businesses in the region are now operating below capacity, which is a significant increase from 50% a year ago. 

Business challenges

Companies in the West Midlands also report a range of challenges, particularly in terms of the labour market. The proportion of businesses that cite issues with the availability of management and non-management skills is up from 13% and 25% in Q3 2018 to 18% and 30% respectively, in Q3 2019. These growing concerns reflect labour market tightening in the region, with the ONS Labour Force Survey showing a fall in the unemployment rate to 4.6% in the three months to June 2019.

Investment

Businesses are also restricting investment growth. All forms of investment expenditure are rising at rates below the UK national average. Capital investment spending is increasing by just 0.3%, the slowest rate across the UK. 
This subdued investment environment is expected to remain in the next 12 months and probably stems from the difficult sales conditions that companies are facing. Staff development and Research & Development budgets are projected to rise at the slower rates of 1.3% and 1.1% respectively, after both increasing by 1.5% in the past year. However, capital investment growth is set to pick up to 1.9% in the coming year. 

Prospects for the next 12 months

Businesses expect export growth to recover over the next year, with projected increases of 2.2%, although they foresee no marked change in domestic sales growth at 3.1%. And following a rise of 3.6% over the last year, profits are projected to slow to 2.8% year-on-year. This may reflect expectations of a slight uptick in input price inflation to 1.8% (from 1.6% over the past 12 months) and the increasing costs associated with faster employment growth, predicted to be 2.1% in the next year, after rising by 1.4% in the last year.