Businesses in the North East regain confidence, despite continued challenges

Business confidence in the North East has returned to positive territory but remains fragile amid ongoing economic uncertainty and skills shortages, a survey of business leaders has revealed.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for the North East of England, published today (Thursday 20 April 2023), put confidence at 8.5 on the index for Q1 2023, a sharp increase from -22.8 in the previous quarter. Only businesses in Yorkshire and the Humber were more confident than those in the North East, the BCM found.

James Callaghan, ICAEW regional director for the North East, said: “I am pleased to see that business confidence in the North East has turned positive once again, pulling off an impressive and welcome reversal from last year’s downward spiral.

“However, companies across the region have told us that such a sea change does not mean that their trials have subsided, even if some of them have at least eased slightly, at least for the time being. Concerns remain over future sales, skills shortages, high inflation and the current tax burden. Plus, with almost 70 per cent of businesses in the region operating below capacity, it’s not surprising that firms remain cautious.

“I hope local and central government take heed of these findings. The companies I speak to are keen to work through whatever challenges lay ahead of them but more government support, for instance, would not go unnoticed.”

Labour market challenges have eased since their peak in Q3 2022 but remain a prominent issue in the region. One in four companies cited the availability of management skills as a growing concern, the highest across the UK, while just under a third were troubled by the availability of non-management skills.

In light of these challenges and high inflation, salaries in the region grew at their fastest rate since the survey began in 2004, and businesses expect to increase them further in the year ahead.

Annual input price inflation stood at 6.4 per cent, the third highest rate in the UK, reflecting the North East’s heavy reliance on the automotive, chemical and energy sectors and their vulnerability to continued supply-side disruptions and increased commodity prices.

To compensate for rising costs, companies in the region raised their selling prices at a rate of 5.4 per cent, which is the fastest rate for the region since the survey first began, as well as the most sudden rise in selling prices to ever take place across the UK. They are however expected to moderate in the year ahead, which will have a knock-on effect on profits growth.

Domestic sales growth is healthy but, owing to a slowdown in recent quarters, companies expect this to slow over the next 12 months, after rising last year at a rate almost double the region’s historical average. However, the anticipated future growth rate remains greater than the outlook for the UK overall.

Meanwhile, exports growth in the North East was among the weakest across the country, likely due to high energy prices and supply-chain disruption. But businesses are optimistic about the year ahead, expecting export growth to rise to 5.2 per cent, the second-highest projection in the UK, behind the East of England.

Notwithstanding the rise in confidence, investment has been minimal. Capital investment grew 2.2 per cent year-on-year, reflecting widespread concerns over spare capacity, ICAEW said. The BCM found that 69 per cent of businesses in the region were operating below capacity, which is by far the highest proportion in the UK.

Consequently, only a slightly higher increase is planned for capital investment in the next 12 months, while the rate of investment in research and development budgets will decrease within the same timeframe to 1.1 per cent, which is almost a full percentage point below the region’s historical average.

By Mark Adair – Correspondent, Bdaily

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