North East businesses invest to overcome challenging economic conditions
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Professor Kieran J Fernandes, Professor in Operations Management at Durham Business School reflects on the findings of the fourth quarterly economic survey of 2022 and its implications for businesses in the North East. Durham University Business School is the associate sponsor of the survey.
The fourth quarter of 2022 was impacted by several geopolitical challenges and the cost-of-living crisis. While many indicators show a healthier business environment than in the last two quarters, this is not reflected in future indicators, with businesses clearly concerned about the future. Businesses are concerned about the future profitability and future turnover indicators, which are down -14.3% and -27.4% on last year respectively. Future turnover is down -3.9% in the last quarter, although future profitability is up 6.0%.
This is not surprising as we notice that the UK economy has also struggled to grow except for business investment and the forecast from the British Chambers of Commerce (BCC) is that the UK economy will not return to growth until Q4 2023. Contributors to this are the fall in household spending because of rising energy costs and falling real wages. However, there is a slight easing of inflationary pressure, in part due to the Government’s energy price guarantee. Current prices have retracted -12.0% since last quarter, although are still up 16.8% from last year. Future prices are still projected to rise, having increased 2.1% from last quarter. This is likely to have an impact on the energy and production costs in Q1 of 2022 but with the backdrop of pressure on employees seeking higher wages via industrial action.
While the workforce and future workforce indicators have decreased -18.6% and -16.5% respectively since last year, there is a shortage in some sectors that could lead to price pressure in 2023. At the UK level sectors like technology, health and services continue to struggle to fill vacancies which could potentially exacerbate the current inflation issue. Businesses are not optimistic about the future, as while the current workforce has increased by 2.3% in the last quarter, the future workforce has declined by 7.7%. Cashflow too is still depressed, although less so than last quarter. Businesses are trying to mitigate this by continuing to invest in their training and plant plans. Training investment plans are up 5.4% in the last quarter, and Plant investment plans are up 10.4% in the same timeframe.
Inflation and Energy costs are the two main business concerns and could potentially have an impact on inflation in 2023. The geopolitical situation in Europe remains highly uncertain and could have an impact on energy prices particularly if the government does not implement further energy price controls from April 2023. After a slight dip in most concerns in Q3 relative to Q2, percentages of businesses concerned about almost all issues (exception of competition and staff shortages) have either increased again or levelled off, suggesting that longer-term concerns are setting in for businesses.
More businesses are concerned about all indicators except red tape than last year, reflecting the challenging business environment. Interest rates and taxation are the most significantly increased concerns relative to Q3, suggesting that the government needs to be concerned with unintended consequences when addressing other concerns for businesses.
More companies are attempting to recruit across all job types relative to both last quarter and last year, reflecting continued tightness in the labour market. This is mirrored by the increased recruitment difficulties across job types relative to last year and increased recruitment difficulties for clerical, professional and managerial, and skilled manual, and technical roles relative to last quarter. Fewer companies are struggling to recruit semi and unskilled workers than in Q3.
Price pressures remain high across the board, with companies especially under pressure from labour costs and utilities. In the past quarter finance and labour costs have increased most dramatically, at 16.5% and 13.9% respectively. 52.2% of companies are operating at full capacity, an increase of 3.6% from last quarter and a small drop of -0.4% from last year. 82.2% of organisations have tried to reduce expenditure on energy, an increase of 9.3% from last quarter.
Professor Kieran J Fernandes, Professor in Operations Management, Durham University Business School
Chamber analysis of the survey’s findings are available here.
Download the full survey report here.
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