ICAEW Business Confidence Monitor (BCM): Yorkshire & Humber
Q2 2021: Business confidence now well into positive territory
- Exports in the region contracted at a sharper rate than nationally over the last year. Domestic sales performance was also weak.
- Consequently, customer demand retains its position as the most widely cited growing challenge among businesses in Yorkshire & Humber.
- However, employee numbers have remained steady, largely due to the government’s Coronavirus Job Retention Scheme.
- As well as demand factors, regulatory requirements and transport problems are prominent concerns, possibly linked to both Brexit and COVID-19 difficulties.
- Even so, the Business Confidence Index has risen, with most businesses expecting conditions to improve over the next 12 months.
- Companies project record growth for domestic sales, and they forecast that exports will begin rising again. In turn, employment is expected to increase.
- Investment is also set to continue rising, after businesses managed to keep spending growth positive during the pandemic.
Yorkshire & Humber’s Business Confidence Index is now well into positive territory at +36.9 in Q2 2021. After enduring a tough year, sentiment has clearly been lifted by the positive developments in vaccine distributions and, ultimately, the prospect of a sharp rebound in activity as economic and social conditions begin to normalise.
Exports and domestic sales growth, and customer demand as a challenge
The strength of overall company confidence relates to the outlook for the year ahead. In contrast, the past year has been extremely challenging. Export performance has been weak over the last 12 months, with the region’s large manufacturing sector facing significant difficulties in both domestic and international markets. Exports are 1.7% below their level from a year ago, which compares unfavourably with the drop of 0.7% seen nationally. Domestic sales have fared slightly better, falling by just 0.1%.
Reflecting these weak sales conditions, customer demand remains the most widely cited growing concern among companies in the region, as it has been throughout the pandemic. Indeed, 40% of businesses report this as a more pressing issue in Q2 2021, compared to 30% in the quarter before the pandemic struck.
Despite the weakness of sales, employee numbers have remained fairly stable over the last year. This clearly relates to the government’s Coronavirus Job Retention Scheme, which has helped to protect jobs as the Yorkshire economy suffered a large shock to output. The impact of the scheme is striking when placed in the context of the global financial crisis, after which employment contracted by 4.0%.
There remains a great deal of uncertainty over the future course of the COVID-19 pandemic, with the emergence of new variants of the virus in key global markets posing a large risk. As well as this, a large proportion of companies report regulatory requirements as a growing challenge, possibly reflecting Brexit difficulties as well as COVID-related restrictions.
Transport problems, which until the pandemic were a minor concern among companies in Yorkshire & Humber, are now among the most widespread challenges, with 26% of businesses reporting them in Q2 2021. Shortages of road and air capacity due to COVID-19 restrictions are probably hampering the operations of businesses. High levels of demand for delivery services may also be putting pressure on some companies. Delays at ports because of new customs processes in the wake of Brexit could be another factor.
Investment and plans for next 12 months
Despite the challenging environment, and unlike in many UK regions, Yorkshire & Humber businesses continued to increase their investment spending over the past 12 months. Research & Development (R&D) budgets rose 1.5%, while the 1% increase in capital spending over the past year was the strongest rate across the UK. Probably in consequence, the expected rises in capital investment and R&D budgets in the year ahead are slightly more modest than the rebounds projected nationally.
Prospects for the next 12 months
The improvement in confidence among businesses is underpinned by expectations of a strong upturn in sales as vaccines are distributed and restrictions are eased. While there are clear risks to the outlook, looking forward in the year to Q2 2022, domestic sales are forecast to expand by 7%. If achieved, this would be the strongest growth seen in the region since the survey began in 2004. A release of pent-up demand in the region’s relatively large manufacturing sector should help drive growth here.
The projected recovery in exports is slightly more muted at 3.1%, possibly relating to expectations of slower growth in European markets than in the UK, and perhaps some Brexit effects. Exporters in Yorkshire & Humber are among the most reliant on the EU market. The overall rise in demand should also enable businesses to start hiring again, with employee numbers projected to rise by 1.6% over the next 12 months.