FEATURE Business Performance Remains Steady, But Weak

After a significant drop across all indicators in Q3 22, business performance in Northern Ireland during Q4 22 remained steady, albeit at a very weak level. That’s according to the findings of the latest Quarterly Economic Survey from NI Chamber and business advisors BDO NI.

Two in three businesses who responded to the survey stated that demand for their goods and services is falling, although for most (51%) only a little. 55% believe their business will grow in 2023, while 33% expect it to contract. Members are considerably less optimistic about prospects for the NI economy as a whole, with 68% expecting it to contract in 2023. Only 18% expect the local economy to see some growth this year.

Trade and demand

Most businesses are still trading well (31%) or reasonably (49%), however, there are signs that businesses are not performing as well as the same time 12 months ago. In Q4 22, 31% of NI Chamber members said they were trading well, down from 40% in Q4 21. One in five reported finding trading conditions challenging, with 14% just covering costs.

More members believe issues with the Northern Ireland Protocol can be resolved compared to this time last year. In Q4 22, 49% said they believed that the Protocol issues can be resolved in the coming year, compared to 39% in Q4 21. However, one in four members said they did not believe Protocol issues will be resolved this year.

Confidence and investment intentions

Members continued to express concerns around their business profitability in the next 12 months. Confidence around profitability plummeted for both sectors in Q3 22. In Q4 22, the profitability balance remained negative in both the manufacturing and services sectors, meaning more businesses expect profits to fall in the next 12 months than rise. However, in manufacturing this has improved significantly, up to -7% from -26% in Q3 22. In services, the balance remained largely unchanged at -19% compared to -18% in Q3.

Investment intentions were mixed in Q4. In terms of training, the Q4 22 training balances remained positive, at +22% (+17% Q3 22) for manufacturers and +11% for services (+16% Q3 22). Investment intentions around capital also improved for manufacturers, at +12% in Q4 22 (+7% Q3 22) but remained negative for services at -1% (-3% Q3 22).

Prices and costs

Expectations to raise prices are highest on record for the services sector in Northern Ireland, ranking it highest across the UK regions. While also still high for manufacturers, expectations have been falling since the start of 2022. 72% (81% Q3 22) of manufacturers and 76% (70% Q3 22) of service businesses said they were expecting to raise prices in the next three months.

The inflationary pressures driving price pressures are acute, with nine in ten businesses impacted. Businesses are facing significant cost pressures in terms of utilities, labour and fuel costs and particularly for manufacturers, raw material costs. The large quarter-on-quarter jump in the share of businesses under pressure from rising utility costs is notable, as is the greater pressure from rising labour costs.

Rising interest rates are also a growing concern. In Q4 21, 18% of manufacturers and 25% of service businesses were becoming more concerned about interest rates. One year later, in Q4 22, this had risen to 51% for manufacturers and 45% for service businesses. In terms of energy, four in five businesses have seen energy cost increases in excess of 30%, up from 60% in Q3 22.

Commenting on the survey findings, Ann McGregor, Chief Executive, NI Chamber said: “In such a prolonged challenging environment, it is welcome to see that our members are not reporting material deteriorations since the last quarter. However, performance is still weak and business prospects around profitability have declined. In Q4, inflationary pressures continued to dominate, with members also expressing greater concern over interest rates. Rising energy costs should be a cause for alarm following the UK government’s recent announcement that it will significantly scale back support for businesses at the end of this quarter.

“Despite the challenges, for a number of reasons 2023 is a year in which Northern Ireland must target investment – seizing the opportunities presented in green growth, digitisation and international trade. Of course, as we know, the number one ask of any investor is political stability – one of the many reasons why we need to see an Executive restored and an agreed, workable outcome on the Protocol reached without further delay.”

The Bdo Perspective

Brian Murphy, Managing Partner, BDO NI

Looking ahead to a new year can often provide business owners with at least some cause for anxiety, particularly after the events of the last year. However, it can also provide an opportunity to look again at your business’ performance, its structure and crucially, your plans for the future.

It is understandable that after the turbulence of the last six months and the uncertainty of recent years, many businesses feel unsure about what the year ahead may bring. However, we have a strong local business community that has demonstrated it can weather a storm or two.

The previous Quarterly Economic Survey showed the resilience of businesses against the challenging backdrop of increased cost of doing business and cost of living. A similar response dominates this latest survey; businesses are recognising that whilst these challenges will endure, with other stumbling blocks likely waiting in the wings, there are still opportunities to grow and invest across sectors.

With more clarity on the energy support scheme roll out, as well as positive signs of progress in negotiations between the UK and EU relating to the movement of goods between GB and NI, companies could find themselves with further capacity to plan for their long-term futures as we move into 2023.

We won’t overlook the fact that performance continues to be described as “weak”, but, context is everything and when evaluated against the incredibly challenging environment it should be recognised that maintaining the status quo in terms of performance, staffing levels and recruitment must be seen as a win.

It is heartening to see that two thirds of businesses expect to stabilise in 2023 with 55% anticipating their own business to grow this year. Although many respondents are confident about their own business, they are less certain about others, with 68% not feeling optimistic about the wider local economy. It is notable though that if their individual business aspirations come to fruition there should be, as a result, a direct impact on the wider economy, which is extremely encouraging.

The survey further outlines that only 1% of businesses are expecting closure this year with a further 6% indicating that they continue to struggle. Whilst we don’t want to see any business in this position, context again is key and 93% of local businesses do not believe they are at risk of closure. These figures are relatively low in comparison to other parts of the UK and only negatively compare year on year to a period in 2022 when businesses were operating during the ‘Covid Recovery’ period.

Understanding your options during this period of struggle, particularly for those small and medium-sized businesses, could be the key to coming out the other end and we at BDO NI work with companies across sectors to do exactly that.

Concern around cashflow continues to be an issue and will likely be a theme for 2023 with many small and medium-sized businesses negatively impacted. How these companies manage their cash flow in the coming months will dictate how they are able to recruit, invest and grow in the short to medium term.

Just over one in two businesses (55%) are operating below capacity which is down from 62% in Q3 2022 – another small but important improvement, demonstrating businesses are becoming more efficient in their output. Efficiencies with businesses will play an important part of strategies in the year ahead.

Manufacturing and services industries are continuing to demonstrate a desire to recruit, only hampered by the lack of skills available to fit the roles available. This issue predates the cost-of-living crisis, pandemic and even Brexit and requires a longterm solution. This cannot be led by the business community alone and requires working in partnership with government.

A key takeaway from this survey is that the local business community continues to react and adapt to the changing (and often restrictive) environment, with one eye on planning for the future where possible. To aid achievable growth across sectors there is a need for government supporting businesses through fiscal levers that limit damage and promote growth.

Although no one can say for certain what 2023 will bring, for businesses to succeed we must be aware of the challenges and be able to deal with areas of risk and concern, we must also use the opportunity a new year brings to plan and adapt for the future to ensure success. Proactive planning by business owners will be key to this success.

We can make 2023 our year. The opportunities are there to make it happen.