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Economic Insight

ICAEW Business Confidence Monitor (BCM): Yorkshire & Humber

Business confidence weakens further as supply-side issue persist

Q2 2022: The latest Business Confidence Monitor (BCM) shows business sentiment weakening across most of the UK. As economic conditions tighten, businesses are facing significant challenges, particularly on the supply-side, that could hinder future growth. Input costs are increasing sharply, while salaries are rising in response to recruitment difficulties and labour shortages. This is despite companies experiencing strong sales growth as they continue to recover from the pandemic.

The results are based on telephone interviews with ICAEW Chartered Accountants that took place between 17 January and 21 April 2022.

  • The Business Confidence Index for Yorkshire & Humberside has weakened for the third successive quarter, and stands below the UK average.
  • Growth in domestic sales is among the slowest across the UK and the outlook for the year ahead is muted. Exports growth has broadly matched the UK average.
  • Businesses face several challenges, with the availability of skills and staff turnover very prominent. Transport problems remain widespread, while the percentage of companies troubled by the tax burden continues to trend upwards.
  • Labour market frictions help to explain why salaries are rising sharply, while input price inflation is running at the fastest pace across the UK, along with Wales and Northern England.
  • In turn, businesses are lifting their selling prices. This, along with sales growth, is forecast to help keep profits growth in firmly positive territory.
  • Spending plans are slightly stronger for capital investment than for Research & Development budgets. Ongoing capacity constraints help to explain this.

Business confidence in Yorkshire & Humberside

The Business Confidence Index for Yorkshire & Humber has weakened in Q2 2022. A reading of +13.1 on the index means that businesses in the region are among the least confident across the UK. Sales prospects are weaker than in other regions, and companies in Yorkshire & Humber continue to deal with several challenges, particularly in relation to the labour market. 

Exports and domestic sales growth

With the exception of the South West, domestic sales growth was slowest in the region over the year to Q2 2022 (5.4%). For the 12 months ahead, companies anticipate this to moderate very slightly. This is the weakest outlook across the UK. Over the last year, however, export growth (3.0%) broadly matched the national outturn. Over the next year, the pace of growth here is expected to improve. 

Business challenges

As businesses continue to navigate through the recovery phase of the pandemic, a number of supply-side problems have emerged. As was the case in the previous quarter, staff turnover and the availability of non-management skills remain the most widespread growing challenges for businesses: 48% cite the former and 46% the latter. In addition, the proportion of companies being increasingly challenged by the availability of management skills continues to exhibit an upwards trend. At 28% in Q2 2022, it now stands at the highest rate seen in the region since the survey began in 2004.

Further still, transport problems continue to be a major problem, particularly in the region’s large manufacturing sector. Although the rate of incidence has eased from recent quarters, it remains elevated by historical norms, at 31%. Continued problems with the availability of HGV drivers may be part of the reason for this. Brexit-related disruptions to current trading and delivery arrangements could also be part of the problem. Another challenge that has grown in prominence is the tax burden. This is now a more pressing issue for 25% of companies, the highest rate since the first quarter of 2008

Labour market

As businesses try to overcome recruitment difficulties, average total salary growth has picked up sharply. After increasing by 2.0% in the year to Q2 2022, businesses plan a stronger 3.2% increase in the 12 months ahead. If achieved, this would be the fastest rise in around 14 years. Nevertheless, businesses still expect to be able to increase their staff levels. Employment growth of 2.3% year-on-year in Q2 2022 is expected to be broadly maintained over the next year. 

Input, selling prices and profits growth

Not only are labour costs increasing but so too are other costs. Along with Wales and Northern England, input price inflation is running at the fastest pace (4.5%) across the UK. This reflects ongoing supply-chain disruptions and the surge in commodity prices, boosted by the Russia-Ukraine war. Businesses do not expect these pressures to dissipate quickly. In the year to Q2 2023, input prices are forecast to rise by a further 4.3%, a slightly sharper rate than nationally. 

However, businesses are able to pass on some of these higher costs. After being limited during the pandemic, selling prices were 3.2% higher year-on-year in Q2 2022, and are expected to increase a further 3.4% in the year ahead. The net effect of these price-cost dynamics, along with higher sales, is that profits are rising and are expected to continue doing so.

Investment

Investment rates are starting to return to pre-pandemic norms. Capital investment and Research & Development (R&D) budgets saw similar rises of 2.4% and 2.3%, respectively. For the coming year, businesses plan to increase both forms of investment, although plans for capital spending (2.4%) will stay the same while R&D growth (2.1%) will moderate slightly. The proportion of businesses operating below capacity (46%) is well below the region’s historical average. That will be a factor driving spending on capital assets.