Business confidence plummets as companies grapple with rising costs

Business confidence in the West Midlands has dropped back into negative territory as companies grapple with the rising cost of doing business.

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for the West Midlands for Q3 2022, found confidence at -8.1, continuing a decline from its peak at the end of last year.

Companies in the region face rising costs, supply-side issues and a global surge in energy prices, despite a strong sales performance, both domestically and abroad, ICAEW said.

With firms facing a crisis from the cost of doing business, amid soaring energy prices and high inflation, ICAEW said households and companies would need support in the short-term to get through the next few months.

Costs increased as input price inflation rose by 5.6% in the West Midlands, the highest rate in the UK in the past 12 months and in the region since the survey began.

Only Welsh businesses have predicted a bigger rise in input prices in the year ahead.

Workforce problems have also been a significant challenge for companies in the region. Staff turnover is the most prominent issue, affecting 44% of firms. While the proportion of businesses citing the availability of non-management skills has eased from its recent peak, it continues to trouble firms, the BCM said, and more than one in three firms were troubled by the availability of management skills, an all-time high for the West Midlands.

Regulatory requirements were a difficulty for 39% of businesses, while one in three reported transport issues as a growing challenge – twice the historical average. This reflected disruptions to the region’s complex supply chain networks in manufacturing and distribution, the report said.

In the past year, businesses in the West Midlands registered the fastest rise in exports for nine years and near-record domestic sales growth. Exports growth is expected to outpace the rest of the country in the year ahead, while firms are also projecting a healthy rise in domestic sales.

However, this robust sales growth has been eclipsed by problems within the labour market. Growing demand for workers, triggered by Brexit-related staff shortages and people leaving the workforce during the pandemic, could impede the ability of businesses to meet sales targets next year, ICAEW said.

Employee numbers were 4% higher than their level a year ago, the highest in the region since the survey began in 2004, and faster than the national average. Salary growth was also at a survey-high and a sharp rise is expected in the year ahead.

Selling prices increased at a record pace as businesses responded to rising costs, with substantial increases expected over the next 12 months.

Profits rose at near-record pace, but growth is set to slow in the year ahead.

Justin Kyriakou, ICAEW Midlands regional director, said: “Business confidence in the West Midlands has fallen sharply, back into negative territory, as companies struggle with the rising cost of doing business.

“While sales have been strong, for many companies this has been eclipsed by soaring inflation, a severe skills shortage, and surging energy costs.

“With inflation running at levels not seen for 40 years, ministers must provide targeted support for struggling businesses and households to keep the lights on this winter.”

Nationally, business confidence fell into negative territory, with sentiment at -5 on the index, down from its peak of 47 a year ago, with higher costs and significant skills shortages weighing down expectations despite a strong sales performance, ICAEW said.