ICAEW Business Confidence Monitor (BCM): Wales

The latest national Business Confidence Monitor (BCM) for Q4 2024 shows a significant decline in sentiment from the previous quarter, with confidence only just remaining positive, as businesses digest the implications of the proposed tax increases in the Autumn Budget and domestic sales growth eased.

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.

• Confidence in Wales dropped into negative territory in Q4 2024, falling to -12.1, significantly below the UK average of +0.2.
• While domestic sales growth increased slightly from the previous quarter it lagged the national average and businesses in Wales have the weakest exports growth expectations of any region over the coming year.
• As a result, customer demand is the main business concern in Wales, followed closely by the tax burden.
• Welsh companies reported the sharpest increase in cost pressures of any UK region, and while they forecast these will ease over the next 12 months, input cost inflation will remain above its historical average.
• Employment growth in Wales slowed significantly in Q4 2024 and this trend is expected to continue over the next 12 months.
• Welsh companies intend to reduce the rate at which they increase capital investment and R&D budgets next year.

After becoming the most confident region in the UK in the previous quarter, business sentiment in Wales fell in Q4 2024, dropping into negative territory with a score of -12.1. The region now appears to be one of the least confident in the UK, with only the South West reporting a lower score (-15.5). The election of a Labour government in early 2024 previously appeared to boost confidence in Wales, as businesses hoped for greater cohesion between the region’s devolved government and Westminster. However, recent announcements in the Autumn Budget alongside increasing economic uncertainty have severely dented confidence in the region, leading to a relatively pessimistic outlook among businesses in the region.

Annual domestic sales growth in Wales remained steady from the previous quarter, at 2.7% in Q4 2024. However, this growth was below both the region’s historical average (3.1%) and the national average (3.2%). Despite the pessimistic economic outlook for the year ahead, Welsh businesses expect domestic sales growth to increase over this period, rising to 5.1% and marginally outpacing the 4.9% growth projected nationally. Nationwide survey results show that companies within the IT & Communications, Business Services and Banking, Finance & Insurance sectors are projecting the strongest domestic sales growth over the year ahead and these expectations are likely contributing to the projections in Wales.

Welsh companies also reported exports growth in the year to Q4 2024 of 3.4%, above the region’s historical average of 2.9%. However, unlike all other regions, businesses in Wales expect exports growth to slow in the year ahead to just 2.6%, significantly below the UK average of 4.0% and the weakest expansion projected in any UK nation or region. The recent poor performance, persistent input cost pressures and the relative importance of the Manufacturing & Engineering sector in Wales is likely contributing to the weak expectations in the region.

After softening in the previous quarter, companies in Wales reported that input price inflation increased to 5.1% in the year to Q4 2024. This growth was nearly double the region’s historical average of 2.7% and was the highest of all UK nations and regions. Welsh companies anticipate that the rate of input price expansion will moderate significantly over the coming year to 3.0%. However, this projected rate of inflation will still be above the 2.7% growth expected in the UK as a whole.

Despite the uplift in input price growth, businesses in Wales reduced the rate of selling price growth for the third consecutive quarter, to 2.9%. Despite this decrease, annual selling price growth was still nearly double the historical average (1.5%). Even though businesses in the region plan to moderate selling price growth in the coming 12 months, the projected growth of 2.3% will remain marginally ahead of the national average of 2.2%.

Following a decline in the previous quarter, Welsh companies reported a marginal uplift in profits growth in the year to Q4 2024, with a 2.8% rise. However, below-average domestic sales growth alongside high input price inflation resulted in the profits growth lagging the national average (3.3%), only outpacing the East of England and the South West. While Welsh companies predict an improvement in profits growth over the coming year, the projected growth of 3.8% is lower than the national average of 5.0% and among the weakest in the UK.

Employment growth contracted for the second consecutive quarter, rising by just 0.2% in the year to Q4 2024, significantly below the region’s historical average (1.3%) and the weakest increase in the UK. Even though Welsh companies plan to increase the rate at which they increase their staffing levels in the coming year, the projected expansion of 0.9% is lower than all other UK regions, significantly behind the 1.9% growth expected nationally. Weak employment growth is reflected in the share of businesses citing labour market concerns in Wales, with 33% of businesses citing staff turnover as a rising challenge in Q4 2024, a larger share than in any other region. The availability of non-management skills (33%) was also cited by a larger proportion of companies compared to the national average (26%).

Despite the significant decline in employment growth, Welsh companies reported a modest uplift in salary growth in the year to Q4 2024, to 3.1%, widening the gap to the region’s 2.1% historical average and matching the national average. Businesses in the region expect the rate of increase to slow slightly in the year ahead but the region will continue to match the 2.7% rise expected nationally.

Below-average domestic sales growth and the sluggish rise in exports resulted in customer demand becoming the most widespread rising challenge in Wales, with 42% of companies citing the issue in Q4 2024. At the same time, the announcements surrounding National Insurance Contributions (NICs) and other taxes meant that the tax burden became an increasingly prominent worry for businesses in Wales, with 41% of companies reporting the issue as a rising challenge in Q4 2024. This was only 1 percentage point below the region’s historical high in Q3 2023 and matched the rate seen in the UK as a whole.

A significant proportion of Welsh companies continue to face issues with regulation, as the number of businesses citing regulatory requirements as a rising challenge rose sharply in Q4 2024, reaching 36%. However, while this share makes regulations the third most prevalent challenge in the region, it is marginally below the region’s historical average of 39% and is a more prominent concern for businesses in all other UK regions apart from Scotland and the West Midlands.

Capital investment slowed in Wales for the second consecutive quarter in Q4 2024 to just 1.8% year-on-year. This increase was only marginally below the region’s historical average of 1.9% but was the weakest expansion of any UK nation or region. Over the next year, businesses plan to reduce capital expenditure growth significantly, only projecting a slight increase of 0.1%.

Wales was the only UK region in which businesses reduced their R&D budgets in the year to Q4 2024, with a 0.7% decline. This trend is expected to continue over the next year, with a further 0.7% reduction anticipated in the year ahead.

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