Q4: Slump in business sentiment in the East Midlands as confidence score turns negative.
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 14 October to 13 December 2024.
- Sentiment fell sharply into negative territory in Q4 2024, and the East Midlands remains one of the least confident regions in the UK.
- Domestic sales growth slowed but future expectations are stronger than in most other parts of the UK, while the outlook for exports growth is relatively modest.
- Input price and selling price inflation both continued to ease and businesses expect further improvements next year.
- Employment growth slowed significantly and, while businesses plan stronger growth in the coming year, staff turnover remains a challenge and businesses anticipate that wage inflation will persist in the coming 12 months.
- Despite the rise in concerns about the tax burden and customer demand, regulatory requirements were the most pressing challenge for businesses.
- Investment improved in the latest quarter and businesses plan to maintain capital investment growth above the historical average but expect to moderate R&D budget growth next year.
Business confidence in East Midlands
Business sentiment declined sharply in the East Midlands in Q4 2024, with the Business Confidence Index dropping into negative territory at -10.1, and the region continues to report one of the lowest readings across UK regions and nations. This score was the lowest confidence has been among businesses in the region since Q4 2022 and is significantly weaker than the UK average (+0.2) and the regional historical average (+3.9). Confidence fell nationally as companies faced increased uncertainty in the wake of the Autumn Budget and faltering UK economic growth. In the East Midlands businesses were also more likely to report a growing concern about customer demand amid weaker domestic sales and exports growth and continued to cite the regulatory burden as a growing challenge, with these factors no doubt weighing on businesses' optimism about the year ahead.
Domestic sales and exports growth
Businesses in the region reported a marked slowdown in domestic sales growth in Q4 2024 compared to the previous quarter. However, domestic sales growth of 3.4% remained above the national average (3.0%) and the regional historical average of 2.9%. Companies in the region continue to be optimistic about future domestic sales growth, projecting sales growth of 5.4% for the next 12 months. This is one of the strongest forecasts across UK regions and nations. The expected growth across the main service sectors, including IT & Communications, Banking, Finance & Insurance and Business Services is likely contributing to this stronger outlook.
Exports growth eased again slightly to 3.0% in Q4 2024, but the reported rate was still above the historical average (2.6%) and marginally stronger than the national average (2.8%). Exports growth is expected to improve in the 12 months ahead, rising to 3.3% but this is weaker than the projected national average of 4.0%. The weaker export expectations among Manufacturing & Engineering and Transport & Storage businesses in the region may explain the relatively soft forecast.
Business challenges
In most regions and nations of the UK, the tax burden has become the primary growing concern for businesses following the tax rises announced in the Autumn Budget. The proportion of businesses citing the issue rose to 42% in Q4 2024 in the East Midlands, a record survey high, however, the issue is secondary to regulatory requirements for businesses in the region which continues to be the most prominent challenge in the region. Half (50%) of companies surveyed cited regulation as a growing challenge, the largest proportion across UK regions and nations, and higher than the survey's historical average (39%). Concerns about regulation were notably greater among businesses in Energy, Water & Mining and Construction in the latest quarter, which is likely reflected in the responses for the East Midlands.
Alongside the tax burden, customer demand was the second-most significant growing business concern in the East Midlands, also cited by 42% of companies in the region and the joint-highest reading across the UK besides Wales. As trading conditions remain challenging it is also notable that competition in the marketplace was reported by 36% of businesses in the East Midlands, above the national average of 31%.
Labour market
Employment growth in the region slowed to the lowest rate since Q1 2022. Growth of 1.1% was weaker than the national average (1.7%) but broadly consistent with the regional historical average (1.0%). Companies in the East Midlands are optimistic about workforce expansion over the coming year, projecting growth of 2.3%, the second strongest forecast across the UK behind the North West and above the UK average (1.9%).
After an uptick in the previous quarter, wage inflation reverted to its downward trend. Businesses in the East Midlands reported that salaries grew by 2.9% in the year to Q4 2024, the lowest rate of growth since Q2 2022 and slower than the national average (3.1%). However, businesses appear to think that wage inflation will continue to be sticky and expect salaries to grow by 3.0% in the year ahead, significantly above the historical average (2.1%) and stronger than most other UK regions and nations, with only businesses in Yorkshire & Humberside anticipating stronger growth next year.
Responses to the survey continue to show that staff turnover is a more significant growing challenge for businesses in the East Midlands than in most other regions, reported by 31% of companies compared to 21% nationally in Q4 2024. High staff turnover may mean that businesses expect to have to raise pay to retain staff and may be factoring this into their projections for wages growth, alongside growing labour demand and the forthcoming uplift in the National Living Wage.
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 3.7% in Q4 2024 which is consistent with the UK-wide average. However, input price inflation remained above the historical average (2.7%) and while businesses in the East Midlands expect inflationary pressures to ease further over the coming year, forecasting growth of 3.3%, this is the highest expectation across the UK.
Selling prices followed a similar pattern, with growth easing to 2.7% in Q4 2024 and only marginally ahead of the UK average (2.5%). Businesses in the region plan to grow their selling prices by 2.2% over the next 12 months, consistent with the UK-wide outlook and edging closer to the historical average of 1.5%.
Despite weakening sales growth, the persistent easing of inflationary pressures appears to continue to support a gradual improvement in profits growth in the East Midlands. In Q4 2024, businesses reported growth of 2.9%, up from 2.2% in the previous quarter and above the historical average (2.6%). However, companies continue to report lower growth than the national average (3.3%) and while they expect significant improvement in the year ahead, the forecast growth of 4.3% is lower than anticipated in many other regions and the UK projection (4.9%).
Investment
The Q4 2024 survey suggests that investment improved in the East Midlands in the latest quarter. Growth in capital investment spending picked up again in Q4 2024 to 2.6%, the strongest growth reported in the UK behind the North West and above the historical average of 1.9%. However, businesses plan to lift their capital expenditure at a lower rate in the next 12 months, by 2.1%. That said, capital expenditure growth in the region is set to exceed the national average (1.8%) and most UK regions in the coming year.
R&D budget growth also picked up, rising to 3.2% in the year to Q4 2024 and significantly stronger than the national average (1.6%) and the historical average (1.8%). Businesses do not plan to maintain this rate of growth over the next 12 months, anticipating that R&D budgets will expand by only 1.1% and below the national projection (1.6%).