The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 15 January to 22 March 2023.
- The Business Confidence Index for London reached +14.0 in Q1 2024, up from +4.9 in Q4 2023.
- Domestic sales growth continued on its downward trajectory and export growth remains weak. However, companies anticipate improvements in both over the coming year.
- Input price inflation moderated in London compared to recent quarters and is expected to slow further in the next year. Salaries grew at the slowest rate across the UK, but London businesses expect salary growth to accelerate.
- Profits growth improved slightly but remains weak. However, companies anticipate above average growth in the year ahead.
- Regulatory requirements continue to be the most widespread growing issue for London businesses. Competition in the marketplace and customer demand are still prevalent challenges.
- Businesses continued to increase capital investment at a broadly similar pace to the previous quarter, but they expect capital expenditure to ease in the year. R&D budgets will mirror this trend.
Business confidence in London
Sentiment increased in Q1 2024, with the Business Confidence Index at +14.0, up from +4.9 in the previous quarter and almost identical to the UK average (+14.4). After a sustained dip throughout 2021 and 2022, confidence has broadly been on an upward trend throughout 2023, and Q1 2024 marks the first quarter where the index exceeded its historical average since Q1 2022. Yet businesses in the capital remain somewhat cautious compared to some other regions and nations, as domestic sales and exports growth in the capital remain relatively weak.
Domestic sales and exports growth
Indeed, domestic sales growth continued on a downward trend in the latest survey. In the year to Q1 2024, domestic sales expanded by 2.9%, the lowest rate in the capital since Q3 2021, although in line with London’s historical average of 3.0%. Companies expect a better outcome in the next 12 months, anticipating domestic sales to grow by 4.4%, although lagging behind most other nations and regions.
Export growth increased this quarter, but only marginally, recording a rate of 2.3% compared to 2.1% in Q4 2021. As a result, the growth rate remains below London’s historical average of 3.4%. However, businesses are more optimistic about export performance in the year ahead. Export growth is forecast to jump to 5.0% in the next 12 months, one of the largest anticipated growth rates among UK nations and regions.
Business challenges
Regulatory requirements continue to be the main growing challenge to businesses in London, cited by 41% of businesses. This was followed by marketplace competition. London was only behind Yorkshire & Humberside in citations for this issue, with 32% of companies reporting it as a growing challenge.
Customer demand remains a prevalent concern, with 31% of companies citing it as a growing challenge, a similar rate to the national average (32%). At 21%, London has the highest proportion of businesses citing issues with access to capital as a growing challenge and this may be impacting their future capital investment decisions.
Labour market
Employment growth picked up in Q1 2024, after two quarters of decline. Employment expanded by 2.0% in the 12 months to Q1 2024, slightly above London’s historical average. Businesses anticipate employment to continue growing at a similar rate (2.1%) over the following year, just in line with the national average.
The pace of salary growth in London continued to slow in Q1 2024, with a recorded rate of 2.9%. Although this is above the historical average (2.0%) it is significantly below the national average of 3.7%. However, unlike many other regions, businesses in London expect salary growth to accelerate over the next 12 months, with salaries increasing by 3.3%. The East of England is the only other region where the salary growth rate is expected to rise in the coming year.
Input price, selling prices and profits growth
Input prices continued to rise in London, however at a more moderate level than previously. In Q1 2024, the annual growth rate reached 4.4%, above the historical average (2.3%), yet below the national rate of 4.7%. Businesses forecast input price growth will continue to ease over the year ahead, at 3.0%.
Selling prices follow a similar trend to input prices. Although they rose by 2.3% in the year to Q1 2024, the pace of growth has now been slowing for two consecutive quarters, and companies project a similar rate over the next 12 months.
Despite moderating costs, weak sales performance appears to be impacting profits growth for businesses in London, which remain relatively weak. Over the 12 months to Q1 2024, profits expanded by 1.5%, an improvement from the previous quarter, at 0.9% but much lower than the historical average of 3.4%. Profits growth in the capital was among the lowest of all UK nations and regions. Businesses are optimistic that their profits growth will accelerate in 2024, as lower inflation and strengthening confidence feed through to improved sales. Indeed, profits are forecast to grow by 4.8% over the next 12 months.
Investment
Businesses continued to increase their capital investment at a broadly similar pace to the previous quarter and in Q1 2024 capital investment growth was running at 1.8%. This is marginally below the historical average of 2.2%. A comparatively high proportion of London companies cited access to capital as a growing challenge which may be linked to the somewhat muted expectations for future capital investment growth in the region. Companies predict growth of 1.4% in the next 12 months, lower than most other UK regions.
Similarly, growth in R&D investment has been largely stable in recent quarters. In Q1 2024, annual growth of R&D budgets stood at 2.1%, a slightly faster pace than the national average (2.0%). London’s businesses are planning to continue to grow their R&D budget in the year ahead, but at a much slower rate of 1.1%.
