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.
- Wales reported the largest increase in confidence of any UK region in Q3 2024, rising from +5.0 in Q2 2024 to +26.1. The boost in sentiment is underpinned by strong domestic sales expectations and hopes that a Labour government in Westminster will boost public investment in Wales.
- Renewed business optimism in Wales followed disappointing domestic sales growth in the last year, which lagged the national average, amid concerns about customer demand, competition in the marketplace and late payments.
- Welsh companies have the joint highest expectations of UK regions for domestic sales for the year ahead and the election results have seemingly soothed regulatory requirement concerns, as citations dropped to a near-survey record low.
- Cost pressures also continued to dissipate for Welsh businesses and, while remaining above the national average, companies forecast these cost pressures will ease further.
- Employment growth in Wales continued to outpace the national average in the year to Q3 2024 and this trend is expected to continue over the coming year.
- Higher sentiment is not reflected in company investment plans and, despite strong profit growth expectations, Welsh companies intend to reduce the rate at which they increase capital investment and R&D budgets next year.
Business confidence in Wales
Sentiment in Wales climbed significantly in Q3 2024 and was the highest of any UK nation or region. The Business Confidence Index rose from +5.0 in Q2 2024 to +26.1, its highest point since Q4 2021 and considerably above the historical average for Wales of +3.5. Despite an unspectacular year to Q3 2024, Welsh companies have a very positive outlook for the next 12 months, with robust increases in domestic sales, employment and profit growth all expected. Clarity over the future of Tata’s Port Talbot site has also likely been a positive contributor to sentiment, alongside the election of a Labour government in Westminster. Indeed, the Labour government has already pledged a reported £7.3bn toward business infrastructure in Wales over the next five years, with businesses also anticipating a stronger relationship between Westminster and the devolved government in Cardiff.
Domestic sales and exports growth
The rate of annual domestic sales growth eased significantly in Q3 2024, dropping to 2.6%, below the 3.1% historical average for Wales and one of the smallest sales increases in the UK. Businesses in Wales are optimistic about the coming year and foresee a significant uplift in growth to 6.3%, the joint-highest expected growth rate in the UK. Survey results nationwide show that Energy, Water & Mining, Construction and IT & Communications businesses have the strongest sales expectations and this is likely feeding through to the projections for Wales.
The rate of exports growth also slowed in Wales from the previous quarter to 1.4%, year-on-year. This rate of increase was notably weaker than the national average (2.7%) and while companies in Wales expect an uptick in exports growth over the year, the projected 2.2% increase is lower than the historical average (2.8%), with only Scotland forecasting a smaller rise. Welsh economic output is relatively dependent on the Manufacturing and Energy, Water & Mining sectors, both of which have suffered lacklustre exports growth in Q3 2024. These sectors also have the weakest projections for the coming year, weighing on the exports outlook for Wales.
Input and selling prices, and profits growth
Businesses in Wales reported that input price inflation softened for the second consecutive quarter in Q3 2024, to 4.4%. Welsh companies expect the rate of input price growth will decline significantly over the coming year to 2.7%. While this rise would match the historical average (2.7%), businesses in the region predict one of the highest expected input price rises of any UK region.
Meanwhile, annual selling price inflation in Wales continued to ease in the year to Q3 2024, falling to 3.0%. However, despite this decline, price growth was still double the historical average (1.5%) and while companies in the region are planning to moderate selling price growth over the next year, the 2.4% expected increase is still among the highest projected rates in the UK, exceeding the national average of 2.2%.
Relatively weak sales growth and still-high input price rises meant Welsh companies recorded one the weakest profits increases in the UK in Q3 2024, as annual profits growth halved compared to the previous quarter, to 2.1%. However, stronger domestic sales growth coupled with further declines in input price inflation underpin an expected uptick in profits growth projected over the coming year. Welsh companies anticipate that profits will increase by 6.0% over the next 12 months, more than double the historical average (2.5%) and only slower than the West Midlands.
Labour market
Employment growth in Wales outpaced the national average (1.8%) in the year to Q3 2024, despite a modest slowdown compared to the previous quarter. Companies in the region increased staff levels by 2.4% over the year, doubling the historical average (1.2%). Welsh businesses expect a further uptick in employment growth over the coming year, to 2.7%, outpacing the UK average (2.1%) and only behind the expansion predicted in the North East.
Wage growth eased for the second consecutive quarter in Q3 2024, as Welsh companies recorded the smallest increase of any UK region, with growth of 2.8%. Even with this slowdown, this rise was still ahead of the historical average (2.1%). Over the coming year, businesses in Wales anticipate wage pressures to accelerate, diverging from the trend for lower salary inflation expected nationally. Indeed, the rate of salary growth is projected to rise to 3.4%, outpacing almost all other parts of the UK.
Business challenges
The election of a Labour government appears to have eased some of the concerns that Welsh companies had with regulation, as the number of companies citing regulatory requirements as a rising challenge fell sharply in Q3 2024. It dropped to a near-historic low of 27% from 42% in the previous quarter and was less prevalent in Wales than in any other region.
However, the below average domestic sales growth achieved in the past year is reflected in a further increase in the proportion of Welsh companies citing customer demand as a rising issue, to 48% in Q3 2024. This is now the most widespread growing challenge for businesses in the region and was more prevalent in Wales than any other UK region. Other prominent concerns that underpin challenging trading conditions in Wales include competition in the marketplace and late payments which both saw an uptick in citations compared to the previous quarter, with late payments reported by the highest proportion of businesses in 11 years.
Investment
Capital investment suffered a modest slowdown from the previous quarter, but growth of 2.4% in Wales was still broadly in line with the national average growth rate (2.3%) in the year to Q3 2024. However, despite strong profits expectations for the year ahead, businesses plan to reduce investment growth to 1.5%, dropping below the historic average for the region (1.9%) and only outpacing the East of England. Companies increased their R&D budgets by 2.6% in the year to Q3 2024, outpacing both the historical (1.7%) and national (1.7%) averages. R&D budget growth will follow a similar trend to capital expenditure growth and dip marginally below the historic average to 1.6% in the coming year.
