ICAEW Business Confidence Monitor (BCM): Yorkshire & Humber
Q3 2021: Business confidence firmly positive but below UK average.
- Business confidence, though markedly higher, stands a little below the UK average. This may reflect slightly weaker sales projections than nationally.
- Sales are nonetheless expected to improve after a tough year. Linked to this, customer demand has eased as a growing challenge for businesses.
- Businesses plan to expand their headcounts in the year ahead, and salary growth should pick up.
- However, concerns over skill availability and staff turnover are becoming more widespread.
- Transport problems are a more prominent concern in the region than anywhere else in the UK. A shortage of capacity due to COVID is likely to be the main explanation, although Brexit may also be a factor.
- And input costs are expected to continue to rise. In turn, companies plan to increase their selling prices at their fastest rate in a decade.
- All forms of investment should also increase over the next 12 months, as companies try to address capacity constraints and meet a surge in demand.
Yorkshire & Humber’s Business Confidence Index is in firmly positive territory in Q3 2021, at +39.8. After a very challenging past year, business sentiment has no doubt been buoyed by the gradual reopening of the regional economy and positive developments regarding the distribution of vaccines. Even so, the region’s index is below the UK average, with only Scottish businesses standing at a lower point.
Exports and domestic sales growth, and customer demand as a challenge
The past year has been a very difficult one for the region. In Q3 2021 exports are 3.7% below their level a year earlier, the sharpest contraction across all UK regions and nations. Domestic sales have also declined, albeit at the moderate rate of 0.6%. However, there has been a sharp fall in the proportion of firms for whom customer demand is a growing challenge, from a pandemic peak of 51% in the final quarter of 2020 to 38% in Q3 2021. And businesses project strong rebounds in sales growth in the year ahead. Domestic sales are forecast to rise by 7.2%, while exports are expected to see a year-on-year increase of 3.6%. However, both projections trail their respective national outlooks, which perhaps explains why businesses are slightly less optimistic than those in the UK as a whole.
The fall in employment over the past year has been modest, compared to the decline in sales, mainly due to the government’s Coronavirus Job Retention Scheme, which helped to protect jobs. And while the unwinding of the scheme in the latter part of 2021 may lead to some job losses, businesses plan to increase their headcounts in the year ahead. Employee numbers are expected to rise by 2.2%, slightly below the nationwide projection of 3.0%. And companies in Yorkshire & Humber anticipate average total salaries to rise by 2.3%.
The expected pick-up in salary growth is probably linked to marked rises in the proportions of businesses citing either staff turnover (24%) or the availability of non-management skills (25%) as more pressing issues. These are both more than double the rates of incidence the final quarter of 2020. As well as labour market concerns, the percentage of companies reporting transport problems as a growing challenge has surged to 43%, the highest rate across the UK. The most likely explanations are shortages of road-freight and air-freight capacity, as the economy begins to expand. A lack of available HGV drivers is also part of the issue. There may also be some impact from Brexit-induced barriers, with the new trading arrangement leading to delivery delays and supply-chain problems for some companies. Transport issues are likely to have been particularly acute for those small and medium-sized manufacturers that lack the resources to quickly overcome these logistical challenges.
Input and selling prices
As well as higher salary costs, businesses in the region have seen input price inflation of 3.1% over the past year. This was the sharpest increase across the UK. And looking ahead, companies expect a further 2.5% rise, the second strongest outlook across the UK behind the North West, and a return to the rates seen in the region before the pandemic. In turn, businesses plan to increase their selling prices charged to customers. These are set to rise by 2.0% in the year to Q3 2022, which would be the fastest increase in the region in a decade.
Businesses plan to increase their investment spending in the year ahead. After barely changing in the 12 months to Q3 2021, capital investment is expected to grow by 2.9%. This is likely to reflect companies’ need to expand their capital stock following a fall in the proportion who are operating below capacity from 63% in Q4 2020 to 52% in Q3 2021. The stronger financial position of businesses, and the healthier outlook for sales, are also other probable factors driving investment. Growth in Research & Development budgets (2.5%) and staff development budgets (3.1%) are also set to markedly improve after being restricted throughout the pandemic.