Business confidence in the South East has grown but falls behind the rest of the UK

The quarterly national business confidence survey from the Institute of Chartered Accountants in England and Wales (ICAEW) suggests that business confidence in the South East, whilst growing, is falling behind the rest of the UK.

Andrew Griggs, Senior Partner and Head of International at Kreston Reeves, looks behind the headlines to explore why.

The ICAEW interviews 1,000 members across the UK and industry sectors to build a representative picture of the UK economy. Its Q1 findings, published in April, make for interesting reading.

It finds:

• Sentiment amongst businesses in the South East despite improving and being ahead of its historical average, lags behind most other regions and the UK as a whole.
• Domestic sales, whilst above its historical average, has been on a downward trend in recent quarters. There is, however, a notable pickup in export sales growth and businesses in the region are expecting future sales to improve.
• The South East has experienced higher input price inflation than the national average but businesses anticipate these will return near to the historical norm. Salary growth may have peaked, but businesses expect it to grow at a similar rate over the next 12 months and selling price inflation is expected to remain high too.
• Profits growth has weakened but are expected to exceed the historical average in the year ahead.
• Regulatory requirements are now the most widespread challenge faced by companies in the South East, but concerns about customer demand continue.
• Growth in capital investment spending was weak, with businesses planning to slow growth further. In contrast, companies anticipate raising their R&D budgets next year.

Resilience and opportunity

Small and medium-sized businesses in the South East are resilient, flexible and innovative, quick to adapt to changing market conditions and to spot opportunities. However, the past few years has presented businesses with challenges and costs that have been out of their control.

High inflation, soaring energy costs and increased wage bills alongside ever-increasing costs of IT and insurance have left businesses on the back foot.

Businesses have been able to pass some of these costs on to customers, but only to a point. We remain in a position where cost inflation is equal to, or even cancelling out, growth inflation which I believe is why businesses are reluctantly confident. There are however encouraging signs of stability, yet it may take a few more months before businesses truly feel change.

How should businesses respond?

Businesses should continue to look for opportunities for growth. Price growth has, for many businesses, been exhausted, the ability of customers to absorb price increases is limited which means businesses must look for volume growth.

Volume growth, however, must be carefully managed and be defined by quality, not quantity. Businesses should review and clearly identify the markets and customers they wish to attract. They need to plan to win and keep profitable work – and that is no easy task.

Alongside volume growth, businesses will need to make considerable investment in technology and process improvements. Policymakers have a role to play and should look at the ICAEW’s survey with some concern. Growth in capital investment is down, meaning productivity improvements will be hard to achieve.

It is time for government to make bold moves to encourage and reward capital investment and productivity. That will see business confidence return, followed by investment and increased productivity.

You can read the ICAEW’s business confidence monitor here.