The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits 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 April to 22 June 2024.
- Sentiment rose in the North East for the third successive quarter with the Business Confidence Index now at +17.8 and ahead of the UK average.
- Domestic sales growth picked up but from a low base, while exports continued to improve and businesses remain optimistic that both will strengthen further.
- Input price inflation continued to ease significantly and salary inflation was at its lowest rate for 18 months, allowing businesses in the North East to raise their selling prices more slowly than businesses in most other regions.
- Despite easing inflation, customer demand is a key issue for businesses in the region, but regulatory concern is the most widely cited challenge.
- Profits growth in the North East is in line with the historical norm but companies expect significant uplift in the coming 12 months.
- Labour market challenges are more pronounced in the North East, with labour turnover and the availability of non-management skills of greater concern than nationally. Employment growth is expected to slow in the year ahead.
- The investment outlook for the North East is disappointing as businesses plan to scale back capital investment from already low rates and reduce their R&D spending growth next year.
Business confidence in the North East
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Sentiment in the North East rose for the third successive quarter in Q2 2024, reaching its highest level since the end of 2021. The Business Confidence Index reached +17.8 from +13.4 in Q1 2024 and is now ahead of the national score (+16.7) and the region’s historical average (+6.5).
Domestic sales and exports growth
Confidence has been buoyed in the region by a pick-up in domestic sales growth in Q2 2024. After easing in recent quarters, the North East experienced one of the strongest increases in sales growth at 4.6%, with only businesses in Wales reporting higher growth in the quarter. Companies in the North East are optimistic about the outlook, expecting domestic sales growth to accelerate to 5.8% in the coming year, double the historical pace and one of the fastest rates in the UK.
Meanwhile, export growth also continued to improve with a third consecutive increase, reaching 2.2% in Q2 2024. However, this is the weakest rate of growth reported across all parts of the UK. Businesses anticipate a mild improvement to exports in the next 12 months which would bring them in line with the regional historical average (2.5%) but still significantly lagging the projected UK average (4.5%). This underwhelming outlook could be linked to the relatively pessimistic export growth anticipated in the Manufacturing & Engineering sector.
Business challenges
Despite the improvement in domestic sales, 37% of businesses are concerned about customer demand in the region, marginally above the national average (35%) and an increase from 32% in the previous quarter. Customer demand is now the second most common rising issue for businesses in the region. However, the main challenge confronting companies in the North West continues to be regulatory requirements, with 40% of businesses citing the challenge in Q2 2024.
Another growing challenge for UK businesses, particularly those operating in certain industries including construction and business services, is late payments. Almost 1 in 4 businesses in the North East (24%) reported the issue in Q2 2024, compared to 21% nationally.
Labour market issues appear to be impacting businesses in the North West, and staff turnover is the third greatest challenge, with 31% of companies reporting the issue as a growing concern. This is the highest proportion of any UK region and considerably higher than the historical average at 19%, though significantly below the post-covid peak (53%). In addition, the North East is one of the regions where businesses are increasingly reporting the availability of non-management skills as a growing concern. In Q2 2024, 29% of businesses cited the issue compared to 21% nationally. Meanwhile the availability of management skills at 15% has returned to close to its historical average (14%).
Labour market
Annual employment growth in the North East strengthened for the second successive quarter, jumping ahead of the historical average for the region. Growth of 2.3% in the year to Q2 2024 was faster than most other regions and the UK average (1.8%). However, perhaps due to the various labour market challenges facing businesses in the region, they expect employment growth to slow in the coming 12 months, to 1.7%, slightly below the national average (1.9%). Businesses also anticipate the rate of salary inflation to dip considerably in the year ahead, from 3.7% recorded in the latest quarter to 2.5% next year. The projected rate is ahead of the historical average for the region (2.1%) but is the lowest expected across all parts of the UK.
Input price, selling prices and profits growth
Falling inflationary pressure is also supporting business confidence in the region. Annual input price inflation was lower than any other region in Q2 2024 at 3.6% and considerably below the UK average (4.4%). Businesses expect input price inflation to continue to abate in the year ahead to 3.2%, although this is higher than anticipated in all other regions and remains above the historical average rise in the region (2.6%).
Softening input price inflation has enabled businesses in the North East to slow the rate at which they raise their selling prices. Indeed, companies raised their selling prices by 2.9% in Q2 2024, the second-lowest rise in the UK, with expectations that they will lift prices by 2.4% in the year ahead.
As price rises begin to return to more normal rates, so too has profits growth for businesses in the region. In Q2 2024, companies reported profits growth of 2.9%, matching the historical average and only marginally lower than the national average (3.1%). Businesses anticipate a significant improvement in the coming 12 months, projecting profits growth of 5.3%.
Investment
The investment picture in the North East remains somewhat subdued. Growth in capital investment spending was 1.7% in Q2 2024, showing little movement compared to the two previous quarters and below the historical norm (2.3%). Businesses plan growth of just 0.7% for the year ahead, above only the West Midlands (0.6%).
Meanwhile, the growth in R&D expenditure has been more encouraging and growth of 2.1% in the latest quarters was marginally ahead of the historical average (2.0%) and above the national average (1.9%). However, businesses plan to curb R&D spending growth to just 1.0% next year.
