Businesses in Wales reported a decline in business confidence despite a strong sales and profits performance in the year to Q2, a survey of ICAEW chartered accountants has found.
Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for Q2 2024 put confidence at 5 on the index, significantly down from 18.4 in the previous quarter and markedly below the UK reading.
As the new Labour UK Government prepares to complete its first month in office, ICAEW has called on it to work closely with the Welsh Government and the wider business community to achieve its mission of economic growth and deliver a vision for a prosperous and productive UK economy.
The survey found that, though still in positive territory and above the historical average, Welsh companies recorded the largest drop in confidence of any UK region or nation during the survey period.
This was despite domestic sales growth in Wales outpacing every other part of the UK in the year to Q2, at 6.5%, while export sales growth matched the national average. Wales recorded the sharpest profit increase in the UK, with growth of 4.5% year-on-year. Even though businesses expect profits to rise at a rate slightly below the national average next year, the predicted growth rate will be over double the historical average for Wales.
Cost pressures continued to ease for Welsh businesses, though input price inflation and salary growth remained slightly above the national average. These pressures, however, are expected to soften over the next 12 months.
Given the strong increases in sales, employment and profits in Q2, the drop in confidence was likely driven by poor sales expectations for the year ahead as well as political and economic factors, such as uncertainty around the future of Tata Steel works, weak manufacturing performance and the resignation of then First Minister Mark Drakeford, ICAEW said.
Both growth in domestic sales and export sales are expected to slow in the next 12 months, likely as a result of the headwinds facing the country’s important manufacturing sector, which recorded the second lowest confidence reading of all sectors in Q2.
Welsh businesses also reported the strongest increase in employment growth, nearly triple the historical average.
Robert Lloyd Griffiths OBE, ICAEW Director for Wales, said:
“The decline in business confidence in Wales is worrying, but perhaps unsurprising, given the ongoing political and economic challenges that have faced our country.
“This fall in confidence suggests that, despite robust rises in sales, profits and employment in Q2, businesses in Wales are far more concerned about what the future holds than recent gains. However, I am sure our businesses will weather this storm.
“It’s important that the new Labour Government in Westminster works closely with the Welsh Government and the wider business community to achieve its mission of economic growth and deliver a vision for a prosperous and productive UK economy.”
There was a notable rise in the proportion of Welsh businesses troubled by customer demand, amid concerns over future sales growth, with 43% of respondents citing it as a growing challenge – behind only the East Midlands.
Regulatory requirements were also a prominent growing issue for 42% of companies, while two-fifths of firms reported facing greater difficulty with the tax burden, more than any other nation or region, and a 19 percentage point rise from the previous quarter.
Meanwhile, only 5% of businesses were troubled by issues relating to government support, the lowest for nearly four years.
While businesses in Wales raised their capital investment spending at a rate faster than most other nations and regions, companies are planning to scale back their research and development budgets to just 0.9% in the year ahead, which would be the weakest in the UK.
Overall in the UK, business confidence rose to its highest level in over two years, likely driven by weaker input cost inflation feeding through into stronger profits growth and positive domestic and export sales projections, ICAEW said.
