The latest national Business Confidence Monitor (BCM) for Q3 2024 shows a slight drop in sentiment. However, confidence remains high as businesses continue to expect sales and profits growth to improve significantly in the year ahead.
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 July to 20 September 2024.
- Sentiment declined in Q3 2024 and the East Midlands remains one of the least confident regions in the UK.
- However, domestic sales growth picked up strongly compared to the previous quarter, exceeding most UK regions and, while exports growth contracted slightly, it continued above the national average.
- Input price inflation was well above its historical average, but its downward trajectory is expected to continue in the next 12 months. Selling price inflation fared similarly, but growth was still among the highest in the UK.
- Businesses in the East Midlands expanded their workforces faster than the national average in Q3 2024 and salary growth was the highest in the UK and is expected to remain so in the next 12 months.
- Regulatory requirements were the most pressing challenge for businesses in the region, and concern regarding competition in the marketplace and taxes increased compared to the previous quarter.
- Capital investment growth improved but remained among the lowest rates in the UK. R&D spending growth dropped further, falling below the national average, with growth expected to ease further in the next 12 months.
Business confidence in the East Midlands
The Business Confidence Index for the East Midlands fell to +8.2 in Q3 2024, down from +11.0 in the previous quarter. While business confidence is ahead of the historical average for the region (+4.0), the region continued as one of the most pessimistic in the UK, with only the North West and Yorkshire & Humberside recording lower scores. Weak profits growth in the locally important Manufacturing & Engineering and Retail & Wholesale sectors are likely contributing to the fall in sentiment within the region.
Domestic sales and exports growth
Despite the overall fall in confidence, businesses in the region reported a significant increase in domestic sales growth in Q3 2024 compared to the previous quarter. Sales growth of 5.4% placed the East Midlands comfortably above the regional historical average of 2.9%, with only the North East recording faster growth. Companies in the region expect domestic sales growth to increase slightly in the next 12 months to 5.6%, meaning businesses in the East Midlands are among the more optimistic regions for projected sales growth. The expected growth in the Construction sector could be one of the sectors contributing to this stronger outlook.
Exports growth eased slightly to 3.2% in Q3 2024, however, this rate was still above both the historical (2.6%) and national (2.7%) averages. Exports growth is expected to improve in the 12 months ahead, rising to 4.5% and remaining ahead of the national average of 4.0%.
Business challenges
Regulatory requirements continue to be the most widespread challenge for businesses in the East Midlands in Q3 2024, but the share of businesses citing them as a concern (45%) fell slightly from the previous quarter. This rate, however, was still higher than the national average and was likely influenced by growing concern over regulation in the Transport & Storage sector due to its relatively large concentration in the region.
Competition in the marketplace was the second-most significant business concern in the East Midlands, as the number of citations from the previous quarter rose to 37%. Meanwhile, as domestic sales picked up, the proportion of companies reporting customer demand fell to 31%, lower than the historical average for the region (41%). In common with many other regions, tax concern was elevated in the East Midlands ahead of the autumn Budget, cited by 28% of businesses compared to the historical average of 16%.
Labour market
Businesses in the East Midlands continued to expand their workforces at a faster rate than the national average (1.8%) with an increase in employment growth to 2.2%, up from 2.0% in the previous quarter. The rate of increase is expected to slow slightly over the next 12 months, falling back to 2.0%, a weaker growth rate than projected for most other regions but still twice the historical average of 1.0%.
Salary growth in the East Midlands in Q3 2024 was the highest in the UK, rising to 4.5% from 3.7% in the previous quarter. This strong growth is expected to continue in the next 12 months with businesses anticipating growth to remain the fastest in the UK, however, at a reduced rate of 4.0%, compared to the national average of 2.9%.
The high salary growth expectations suggest that, alongside strong demand for new workers, companies in the region may also foresee continued issues with staff turnover over the coming year. Indeed, the proportion of businesses reporting staff turnover as a rising challenge increased in Q3 2024, with the issue now more prominent in the East Midlands than in any other region at 32%. This is likely driven by growing staff turnover in the Retail & Wholesale and Manufacturing & Engineering sectors which account for a significant proportion of the East Midlands economy.
Input and selling prices, and profits growth
Input price inflation in the East Midlands continued on its downward trajectory from its peak in Q1 2023, slowing to 3.9% in Q3 2024. However, it remained above the historical average of 2.7% and higher than any other UK region. It is expected to ease further in the coming 12 months to 3.4%, but this anticipated rate is still the highest of any UK region and well above the national average of 2.4%.
Selling prices followed a similar pattern, with growth easing to 3.3% in Q3 2024. Despite this decline in growth, however, businesses in the East Midlands increased their selling prices at one of the fastest rates in the UK in the year to Q3 2024, only behind Scotland. While selling price inflation is expected to slow somewhat over the next 12 months to 2.8%, growth is projected to remain significantly above the historical average of 1.5% and to outpace all other UK regions.
Strong domestic sales in the year to Q3 2024 supported a slight uplift in profits growth in the East Midlands, to 2.2%. However, the profits growth remained below the historical average of 2.6% and among the slowest of UK regions. An uplift is expected next year to 4.4%. This increase will be driven by the predicted slowing of input price inflation and salary growth alongside sustained domestic sales growth. However, despite this elevated growth rate, the region will be among the weakest in the UK, only outpacing Yorkshire & Humberside.
Investment
Growth in capital investment spending picked up slightly in the East Midlands in Q3 2024 to 1.4%, but this was among the weakest expansions in the UK and below the historical average of 1.9%. However, businesses plan to lift their capital expenditure at a sharper rate in the next 12 months, to 2.3%. Indeed, capital expenditure growth in the region is set to exceed the national average (1.9%) and most UK regions in the coming year.
R&D budget growth fell for the second consecutive quarter, dropping to 1.2% in Q3 2024. This rate was below both the historical (1.8%) and national (1.7%) averages. The rate of increase is expected to slow further in the coming 12 months to 0.8% and is the lowest expected growth rate of all UK regions.
