Business sentiment in South West improves, but challenges remain - ICAEW

Business confidence in the South West is higher than the UK average, although challenges remain a survey published today (Wednesday 26 July) by ICAEW, The Institute of Chartered Accountants in England and Wales has found.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for Q2 2023 – one of the most comprehensive quarterly surveys of UK business activity – put confidence at 9.9 on the index, ahead of both the UK average of 6.1 and the region’s historical average of 4.0.

However, in line with the national picture, rising interest rates and high inflation mean that confidence is likely to be fragile, the report said.

Read more: South West business confidence still healthy, despite small decline - Lloyds Bank

Domestic sales growth in the South West is lagging behind the national rate of 4.9 per cent, growing at a rate of only 3.1 per cent in the year to Q2 2023, although this is set to increase to 4.7 per cent in the next year.

Annual export growth is broadly in line with the UK average at 3.4 per cent in Q2 2023, with a similar growth rate expected in the coming year. This would be the second weakest predicted rate in the country, above only Yorkshire and Humberside.

Customer demand was the biggest challenge facing businesses in the South West in Q2 2023, affecting 39 per cent of businesses, with the retail and wholesale sectors among the worst affected.

The lack of non-management skills is also becoming a growing problem in the South West, likely reflecting the importance of manufacturers in the region who rely on technical and vocational skills.

Some 37 per cent of businesses have reported this as an issue, making it the second most cited challenge in the region. Only the North East had a higher proportion of businesses citing this as a challenge.

Reflecting a national trend, wage growth in the South West is at a record high of 4.6 per cent. The predicted rate of 4.1 per cent over the coming year is expected to be the highest across the UK and around twice the historical average for the region.

Workforce growth in the South West is among the slowest in the UK, at just 1.5 per cent year-on-year. However, staff levels are expected to increase to 2.2% over the next year as businesses anticipate higher domestic sales.

Companies in the South West are facing rising costs, but the rate of increase is slowing. Although input price inflation is double the historical average, this is lower than any other UK nation or region. The rate is expected to fall to 2.8 per cent in the next year, which would be the lowest in the UK.

The predicted reduction in input price inflation is expected to filter down to selling prices. These are currently at 3.1 per cent, the weakest rate in the UK, and are expected to go lower still to 2.3 per cent.

Profits growth is more than three times slower than the historic regional norm, at 0.7 per cent, but it’s expected to improve considerably to 4.8 per cent over the next year, putting it broadly in line with the national average.

The rate of capital investment is 2.7 per cent, but this is expected to slow in the year ahead to 1.7 per cent, which is closer to historic norms for the region.

Although R&D budgets have been increasing, they remain below the region’s historical average, and they are expected to slow in the year ahead as companies continue to face uncertainty.

ICAEW said that to boost confidence, the government must formulate a plan to deliver long-term growth by increasing the resilience of the UK economy and the transition to net zero, while enabling small businesses to operate more sustainably in a difficult economic environment.

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Beverley Waters, ICAEW regional director for the South West, said: “It’s encouraging that business confidence in the South West is outperforming the UK average, standing at more than double the region’s historical average, but challenges remain, leaving optimism fragile.

“Our region is experiencing the UK’s weakest growth in domestic sales, as well as poor availability of skills, declining customer demand and high inflation.

“It’s time for a government plan to deliver a growing and resilient economy which enables businesses of all sizes to operate effectively.”

Nationally, business confidence remains lower than the pre-pandemic average but still positive amid a backdrop of high inflation and interest rates and record wage pressures, with sentiment at 6.1 on the index.