The latest national Business Confidence Monitor (BCM) for Q4 2023 shows a slight shift in sentiment within the quarter. However, the quarter-on-quarter improvement in sentiment is marginal, remaining broadly steady at a similar level over the last few quarters. Overall confidence continues to fall short of the pre-pandemic average.
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 17 October to 15 December 2023.
- Business confidence for Wales dropped for the second consecutive quarter in Q4 2023 and it is more subdued than elsewhere in the UK.
- Annual domestic and export sales growth has eased considerably in Wales, a trend maintained over recent quarters. However, companies are more optimistic about prospects over the next 12 months.
- Input price inflation has fallen sharply, and indeed, the rate of increase is slower in Wales than in any other nation or region. Salary growth is easing but remains elevated by historical norms, and businesses expect growth in the year ahead to be maintained at the current rate.
- Annual selling price inflation in Wales has cooled notably and, like input prices, the pace is slower than elsewhere in the UK. Businesses anticipate growth over the next 12 months will continue at a similar rate. Profits growth has moderated, but companies predict a pick-up as cost pressures subside and sales improve.
- Customer demand is now the main growing concern facing companies in Wales. Bank charges are increasingly problematic, mirroring trends in recent quarters, they are more prevalent in Wales than elsewhere in the UK, and the highest since Q3 2008.
- Linked to the above, and unlike elsewhere in the UK, businesses in Wales plan to cut back on capital investment spending over the coming 12 months, and growth in R&D budgets is expected to be broadly flat. Prospects are weakest in Wales than any other nation or region on both measures.
Business confidence in Wales
Sentiment in Wales has slipped further into negative territory, with the Business Confidence Index now standing at -6.7 in Q4 2023, down from -3.2 in the previous quarter. This marks the second consecutive fall in confidence and makes Wales less confident than any other nation or region in the UK. This is likely a reflection of, in part, pressing financial-related challenges and wider economic uncertainty.
Domestic sales and exports growth
Annual domestic sales growth has eased considerably in Q4 2023, a trend maintained over recent quarters. At a rate of 3.1%, year-on-year, in Q4 2023, it is in line with the historical average for Wales, and this performance is likely to have prevented confidence from falling further. Companies in Wales are, however, more optimistic about prospects in the coming 12 months, with growth reaching 5.5%, which is somewhat ahead of the projected average rate for the UK (4.9%).
In the year to Q4 2023, the rate of exports growth also saw a marked slowdown and, at 2.1%, year-on-year, in Q4 2023, it is weaker than the historical average for Wales (2.8%). And while businesses in Wales anticipate the rate of increase to accelerate to 3.6% in the coming year, it is weaker than in many other parts of the UK. This is particularly concerning as Wales tends to be more reliant on exports.
Business challenges
Several challenges have become increasingly widespread for companies in Wales over recent quarters, and this is likely to have strained business confidence. This is particularly true for bank charges, with 30% of businesses citing it as a growing challenge in Q4 2023. Indeed, it is more prevalent in Wales than elsewhere in the UK and, at almost three times the historical average for Wales, it is now the highest it has been since Q3 2008. The tax burden continues to be problematic for companies in Wales, reported by 30% of businesses in the latest quarter, almost twice the historical average of 16%.
However, it is customer demand which is the main rising issue for businesses in Wales, with 37% of Welsh businesses citing it as an issue. This is broadly consistent with the historical average for Wales and is marginally higher than the UK average of 35%.
Labour market
Annual employment growth in Wales has been trending down over recent quarters and has eased once again in Q4 2023. At 1.2%, it is somewhat lagging the UK average (1.5%) but is in line with the nation’s historical norm. Businesses in Wales plan to raise their staff levels at a similar rate over the next 12 months (1.7%).
As demand for workers and overall inflation moderate, so too has salary growth, which at 4.0%, year-on-year, in Q4 2023, remains elevated compared to the historical average of 2.0%. Indeed, it is still near to the record high of 4.5% achieved in Q2 2023. Businesses in Wales expect to maintain the current rate of increase in the coming year, making Welsh expectations among the strongest across the UK.
Input and selling prices, and profits growth
Companies in Wales continue to face input cost pressures, though these have fallen sharply in the latest quarter. At 3.7% in Q4 2023, annual input price inflation in Wales is slower than elsewhere. Welsh businesses expect it to moderate further in the coming year, to 2.7%, which is broadly consistent with the historical average for Wales and slower than expectations for most other nations or regions.
The rate at which businesses in Wales are lifting their prices has cooled substantially and, like input price inflation, the pace is slower than elsewhere in the UK. But at 2.4% year-on-year in Q4 2023, it is still fast by historical standards for Wales (1.4%). In the year ahead, companies in Wales anticipate raising their selling prices by a similar rate, which is in line with the projected rate for the UK.
Linked to the above trends, profit growth has moderated to 2.1% in the year to Q4 2023, but companies forecast an improved performance in the next 12 months, to 3.8%, as cost pressures subside and sales pick up.
Investment
Investment prospects in Wales are unsurprisingly weak given confidence is more subdued in the nation compared to elsewhere, and as businesses continue to face financial-related and customer demand challenges.
Indeed, capital investment spending and R&D budget prospects are weakest in Wales than any other nation or region. Unlike elsewhere in the UK, businesses in Wales plan to reduce capital investment spending by 0.5% in the year ahead. This is notably weaker than the historical average (1.9%) and marks a considerable slowdown from the current rate of 3.5% year-on-year in Q4 2023 ‒ which placed Wales in the top position on this measure. The picture is also unfavourable for R&D budgets, which companies expect to hold broadly flat.
Wales has among the highest share of businesses operating below capacity, which may mean companies are less incentivised to invest to expand output. This is just one potential explanation of the weak investment environment, and the high prominence of the tax burden and bank charges as a growing challenge among Welsh businesses may be another contributing factor, alongside high interest rates and wider economic uncertainty.
