QBR Q4

Quarterly Business Report

Henrietta Brealey

The final Quarterly Business Report of 2022 looks back at the last three months of another rollercoaster year for businesses and customers alike. The repercussions of Russia’s invasion of Ukraine continue to reverberate across the globe and the ongoing impact continues to be felt by businesses across Greater Birmingham. The data from our latest Quarterly Business Report revealed that price pressures for businesses reached a record high, concerns over the impact of interest rates reached levels not witnessed for twenty years and recruitment challenges remain ingrained as the cost of doing business crisis continues to bite.

Despite these well documented challenges, cautious optimism abounds as we enter 2023. It’s heartening to see that the majority of businesses expect their profits and turnover to go up over the next 12 months. Domestic sales remain anchored in positive territory, export activity picked up this quarter for service firms and we saw a greater number of businesses investing in training their staff this quarter which underlines the durability and resilience of the Greater Birmingham business community. Reflecting on the last twelve months, it was brilliant to see our fantastic city shine on the international stage as the 2022 Commonwealth Games captured the imagination both home and abroad. It’s essential we harness the spirit of those amazing two weeks in July to deliver a lasting legacy for our region that will drive long term economic growth and unlock the potential that exists at the heart of Greater Birmingham.

Professor Julian Beer

Deputy Vice-Chancellor Birmingham City University

A review of macro trends across the year indicates an increase in the proportion of businesses anticipating reduced turnover and profitability (+7 and +13 percentage points respectively between Q1 and Q4); decreases in both sales and advanced orders, and limited labour force growth.

Whilst maintaining this broader view is important, we also know that businesses, especially SMEs, are affected by seasonality in terms of the demand for products and services, cashflow, and associated workforce size. For example, when comparing the Q4 position with the previous quarter, recruitment saw an uplift of +9 percentage points in the proportion of firms looking to recruit, and an associated reduction (albeit slight) in respondents who had experienced recruitment difficulties.

Reflecting investment plans between Q3 and Q4 - whilst caution remained in terms of the planned purchase of equipment, there was an uplift of 5 percentage points in the number of businesses planning to invest in training. Another positive trend between Q3 and Q4 was that fewer businesses were found to suffer from pressure to raise prices as a result of labour costs (-4 percentage points), raw materials (-3 pp), utilities (-8), and fuel (-3).

As we move into 2023, the latest survey results provide cause for cautious optimism. However, with continued fluidity in the macro-economic picture, damaged consumer confidence, and no immediate end in sight regarding geopolitical tensions, the business operating environment will remain uncertain.

In terms of the labour market, employment intentions were found to have slowed with two thirds of businesses (66%) indicating that their workforce will likely remain constant over the next 3 months. Of those looking to recruit, whilst difficulties appear to have stabilised somewhat since Q2, at 71% of firms experiencing challenge, this still remained high. Particular challenge was found with regard to professional/ managerial and skilled manual/technical categories of employee, perhaps reflecting increased caution amongst employees in changing jobs.

About the Quarterly Business Report

The Greater Birmingham Chambers of Commerce’s (GBCC) Quarterly Business Report offers an up-to-date snapshot of the performance of the Greater Birmingham business community. It is the most comprehensive, regular report of its kind in the city-region. Underpinning our report is data gathered from quarterly surveys on key indicators such as sales, exports, investment intentions and the workforce. The Greater Birmingham Quarterly Business Report launched in 2016, succeeding the previous Quarterly Economic Survey Report.

The Chamber surveys businesses across the Greater Birmingham area, which includes Birmingham, Solihull, Sutton Coldfield, Lichfield and Tamworth, Cannock Chase and Burtonon-Trent. Balance figures are determined according to business responses to the indicators: an increase (multiplied by 1), remain constant (multiplied by 0.5), decrease (multiplied by 0).

A figure over 50 is indicative of growth; a figure under 50 represents contraction. Note that figures may not always total exactly due to rounding differences.

Chief Executive Greater Birmingham Chambers of Commerce

The domestic sales balance score fell for the third consecutive quarter but remains in healthy territory.

In total, 40% of businesses reported an increase in UK sales (slightly lower than the 41% recorded in Q3), however, this was offset by the fact that 21% of firms saw their domestic sales fall in the current quarter (an increase of 5% compared to the previous quarter) which led to a two-point drop in the balance score to a figure of 60. A similar picture emerged in the individual sectors. The service sector balance score for UK sales fell by three points to a figure of 62 – much of this was down to the fact that 18% of service firms noted a fall in sales this quarter (an increase of 3% compared to Q3). Challenges were more pronounced in the manufacturing sector as the domestic sales balance score fell to 49 – the first time the score had entered negative territory since the start of 2021. 36% of manufacturers saw their UK sales drop in Q4 (compared to 24% in Q3) which was the predominant driver behind the balance score falling by four points.

Looking ahead to Q1 of next year, the domestic orders balance score for both sectors combined fell by two points to a figure of 57 as 21% of firms expect their UK sales to decrease in the next three months (up from 19% in Q3). In December, the ONS revealed that UK GDP was estimated to have fallen by 0.3% between July and September 2022. Whereas the service sector grew by 0.1%, output fell in the production sector by 2.5% and the construction sector by 0.2% which added to the expectation that the UK is facing the prospect of a recession as we enter 2023.

PRICE PRESSURES & EXTERNAL FACTORS

A total of 58% of businesses across the two sectors expect their prices to go up as we head into the new year (compared to 55% in Q3) whereas 41% suggested that their prices would stay the same (compared to 43% in Q3) which led to the balance score go up by two points. In terms of the main reasons cited by businesses as to why they were under pressure to raise their prices, 26% cited labour costs, 23% cited cost of utilities and 17% referred to fuel costs. The cash flow balance score also picked up for the two sectors combined but remains close to negative territory at 51. 26% saw their cash flow situation improve compared to three months earlier –a five percent increase from Q3, which led to the rise in the balance score.

On 15th December the Bank of England announced it had raised interest rates for the ninth time in a row, with a 0.5% increase to 3.5%. Within this context, it was no surprise to see a fifth of businesses noting an apprehension around the impact of interest rates – an increase of 2% compared to Q3. Concerns around corporate taxation (from 13% to 15%) and business rates (from 10% to 11%) also proved to be more prominent this quarter. However, this was perhaps no surprise given that the Chancellor confirmed at the recent Autumn Statement that the planned increase in Corporation Tax to 25% for companies registering profits over £250,000 would go ahead. The annual rate of inflation in the UK eased to 10.7% in November from 11.1% and it was pleasing to see concerns related to the impact of inflation lessened amongst local firms this quarter (down from 40% to 35% but still one of the largest percentages on record).

The price index balance score reached an all time high of 79 – surpassing the previous record figure of 78 which we saw in Q2.

Export activity picked up for service firms, however, challenges persist for manufacturers as the export order balance score entered negative territory

Across the two sectors combined, 29% of businesses reported an increase in their international sales, an uplift of 4% in comparison to the previous quarter which led to the overall balance score going up by two points to 54. It was reassuring to see the service sector balance score return to positive territory as 27% saw their export sales rise in the last three months (an increase of 8% from Q3) and 20% noted a fall (down from 27% in Q3) which meant the balance score rose from 46 in Q3 to 54 in the current quarter. By contrast, the export sales balance score for manufacturers fell by 7 points to 55 – 24% of manufacturing businesses saw their export sales decrease in Q4 (14% higher than the figure recorded in Q3).

The diverging trend across the two sectors also occurred in relation to export orders. The overall balance score went up by a solitary point to 55 as a greater percentage of businesses in both sectors reported constancy in their non-UK orders for the next three months (up from 51% to 55% in Q4). The service sector balance score witnessed a healthy uplift of 9 points to 57 (with a greater number of service firms expecting their export orders to stay the same next quarter, up from 52% to 62% in Q4). However, the manufacturing balance score for export orders went down by 14 points to a figure of 48, the first time the indicator had entered negative territory since Q4 2020- just under a third of manufacturers anticipate their advanced international orders to fall in the next three months (compared to a figure of 14% in Q3).

Nationally, the value of goods imported decreased by £1.4bn in October 2022, however, when removing the effect of inflation, the import of goods increased by £0.9bn. The value of goods exports fell by £0.7bn (2.2%) in October 2022, with exports to both EU and non-EU countries falling, once the effect of inflation was removed, the export of goods decreased by £1.3bn. For those businesses that are currently experiencing trade related disruption, the GBCC International team is on hand to provide dedicated support and services for exporters and importers. Companies can seek assistance with trade documentation, overseas market information, translation services and foreign currency exchange support – full details can be found on our website.

WORKFORCE & RECRUITMENT

The workforce balance score went up by four points to 60 but broader recruitment challenges continue to linger.

In total, 30% of businesses in the two sectors combined added to their headcount over the previous three months (compared to 24% in Q3) which led to an overall uplift in the balance score. The percentage of businesses attempting to hire staff also went up from 52% in Q3 to 61% in Q4 – the largest percentage on file since Q1 2021. However, of those businesses, 69% faced recruitment difficulties, although this figure represented a two percent fall in relation to Q3, the percentage remains exceptionally high and points to the ingrained challenges businesses face when attempting to recruit staff. The trend was particularly pronounced amongst manufacturers as 85% faced challenges when trying to bolster their workforce (the largest figure on record since Q4 2018).

Looking ahead to the next three months, the balance score for the two sectors combined increased by a single point to 65 – mainly due to the fact that a higher percentage of firms are expecting to add to their workforce over the coming months (up from 31% in Q3 to 33% in Q4). Nationally, for the three months ending October 2022, employment rose slightly by 0.2% to 75.6%. Unemployment rose by 0.1% to 3.7% and economic inactivity declined by 0.2% to 21.5%. During the same period, the employment rate estimate for the West Midlands was 73.6%, 1.7% lower than May to July 2022 whereas the unemployment rate was estimated to be 4.9% - a 0.3% increase compared to the previous quarter and the highest rate in the UK. For the seventh year running, the GBCC will be running its flagship Growth Through People campaign in 2023 and the topics of staff retention and upskilling the existing workforce will feature in the series of events – full details can be found on our website.

In total, 54% of businesses in both sectors combined expect their turnover to improve over the course of next year – an increase of 2% compared to Q3, whereas 16% projected a drop in the same period (compared to 20% in Q3) which led the balance to go up by 3 points to 69. Likewise, the profitability index saw a welcome uplift of three points to 58 – much of this was based upon a dip in the number of businesses forecasting a fall in their profitability over the next 12 months (down from 31% to 25% in the current quarter). 54% expect their profits to rise in the same period (compared to 52% in Q3), however the overall figure of 58 is the lowest on file (outside of the pandemic period) since Q3 2012 when the UK was faced with the threat of a double dip recession.

The balance score for capex investment increased by two points to a figure of 50 as 61% noted that investment plans for equipment had remained unchanged for the previous three months (compared to 56% in the previous quarter). Likewise, it was pleasing to see a noticeable increase in the training investment balance score. 28% of businesses in both sectors said investment plans for training had been revised upwards over the last three months – the figure in Q3 was 23% and this development was the main reason behind the balance score for training investment going up by 4 points to 58. The results mirror national trends as the ONS revealed in December that business investment across the UK is estimated to have fallen by 2.5% in Q3 and remains 8.1% below the pre-pandemic level.

Raj Kandola Head of Policy and Strategic Relationships

The Mini Budget of September will go down in history but not for the reasons it’s author Kwasi Kwarteng was hoping for – the statement led to turmoil on the financial markets as the former Chancellor announced a series of unfunded tax cuts in a bid to boost growth. Jeremy Hunt moved quickly to scrap the majority of announcements in a bid to restore economic credibility, however, as our survey demonstrated, businesses continue to experience the fallout from that ill-fated Budget – concerns over the impact of rising interest rates are the highest on record since the summer of 2002 are a pertinent example.

Despite the announcement of additional support for businesses paying their energy bills beyond March, many firms will feel underwhelmed by this announcement. Whilst it was good to see an ongoing level of support for all businesses, it’s clear that the Government are clearly betting on the recent fall in wholesale prices being passed on to businesses in the coming weeks. We all hope that they are right and ready to adapt their plans if they are not or if businesses face a further round of pressures next winter. As outlined by the British Chambers of Commerce, we need to see the Government formulate an energy support strategy to help improve long term efficiency – whether that’s increasing Ofgem’s powers to protect businesses from unscrupulous operators or pushing for greater devolution to improve energy storage at the regional level.

Greater Birmingham Chambers of Commerce

The balance scores for turnover and profitability both increased this quarter – reversing a 12-month trend, however business investment remains subdued.

Progress has been made on alleviating the cost pressures businesses are currently facing but more needs to be done as we head into 2023.

About GBCC

The Greater Birmingham Chambers of Commerce is a membership-led, business support organisation that has acted as the voice of local businesses since 1813. Today, we continue to connect, support and grow local businesses.

We are one of the largest Chambers in the country, with 2,500 member companies covering six geographic areas across the region (Birmingham, Burton, Chase, Lichfield and Tamworth, Solihull and Sutton Coldfield) and four themed divisions (Asian Business Chamber of Commerce, Future Faces, the Transatlantic Chamber of Commerce and the Commonwealth Chamber of Commerce).

Members range from young professionals to SMEs and large, high-profile organisations, including 38 Chamber Patrons comprising companies such as RSM, HS2 and The NEC Group.

About Birmingham City University

Birmingham City University is a dynamic, business-engaged institution. As a substantial employer with over 2,000 staff and through the provision of graduate talent, research and knowledge transfer, we contribute around £180 million to Birmingham’s GDP.

The university works with in excess of 5,000 businesses, regionally, nationally and internationally, with our courses informed by Industry Advisory Boards, where information about business needs are reviewed and skills challenges are discussed. In 2015 we launched Advantage, the business growth service from Birmingham City University enabling organisations and individuals to get connected with knowledge, skills and money in business, innovation and enterprise.

We have extensive sector linkages providing detailed intelligence and input into future innovation, driving thinking around smart specialisation, the creative economy, advanced manufacturing and health-related life sciences. Through our work with partners such as the GBS LEP, WMCA, Science City, and Creative City Partnership, we take a lead on cross innovation, design and climate change. Innovation is at the core of our work. Working in partnership is at the core of our approach to business.

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