QBR Q2 2023

Henrietta Brealey

A little over 3 years on from the start of COVID-19 pandemic measures in the UK, 2 years from the end of the end Brexit transition period and 1 year on from Russia’s invasion of Ukraine and businesses still have rather a lot to contend with. Inflation remains stubborn, with successive rises in the Bank of England base rate presenting their own challenges. Labour market shortages appear ingrained, particularly for certain sectors and roles. Yet, as this latest Quarterly Business Report data shows, in Q2 the local business community as a whole remained upbeat and optimistic about the opportunities ahead. There were real signs of recovery with domestic sales and orders following consecutive quarterly decreases in the balance score throughout 2022, cash flow projections for businesses across all sectors improved and a continuing upward trajectory for turnover forecasts.

Meanwhile, unsurprisingly business sentiment showed recruitment challenges remain front of mind. Sentiment on capital expenditure fell below the levels we saw at the start of the year, likely a symptom of the squeeze many businesses are managing with regards to price pressures. While there was a notable uplift in export activity reported this quarter, it remains relatively tepid compared to growth sentiment in domestic sales. Yet, according to McKinsey, the UK’s exporting companies are more profitable, more innovative and faster growing than nonexporters. If we are to reach the Government’s export target of £1trillion then we need to scale up activity in sectors where overseas demand is growing. Within this context, we have recently launched the Greater Birmingham Global Chamber of Commerce which aims to help local businesses forge connections across the globe and access opportunities to growing markets around the world – full details can be found on our website.

Professor Julian Beer

Deputy Vice-Chancellor Birmingham City University

The Q2 survey indicates increased levels of buoyancy in both the domestic and export markets. Excluding seasonal variations, sales increased over the last quarter for 50% of businesses (+4pp). Of particular note is the level of export market sales which increased by +11pp to 33% over the same period. Similar positive sentiment was found in terms of increased orders and advance custom for both UK and export markets.

Reflecting the labour force, 29% of businesses indicated that their workforce had increased over the past 3 months, with 43% anticipating an increase over the next quarter with skilled manual/ technical and professional/ managerial the roles in most demand. The survey also indicated high levels of business confidence – 65% were confident that their turnover would improve over the next 12 months. Similarly, 58% were confident that profitability will improve over the same time period – the highest level since September 2021.

However, operating conditions for regional businesses remain challenging and echo the national picture. Inflation was again identified as the external factor that businesses were most concerned about - cited by a third (33%). Despite broad levels of stability and confidence in the regional business base, socio-economic conditions on the global stage remain precarious. The ongoing invasion of Ukraine has led to significant rises in the prices of gas and food basics, whilst unfilled job vacancies have led to high wages. The next quarter will indicate the extent to which the recent hike in interest rates, triggered by high rates of inflation, will affect levels of investment across Greater Birmingham and Solihull businesses.

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

Overall, the number of firms reporting an uptick in their domestic sales increased from 46% in Q1 to 50% in Q2, which is the strongest figure recorded since the beginning of 2022. The domestic sales balance score has risen to 67; therefore, demonstrating a sustained recovery in this area and a return to the range of scores seen in 2021-2022 which were typically between 68-72. This positive trend across all sectors is also mirrored in the manufacturing industry. The balance score for manufacturers also increased by one point to 69 – the highest score since Q1 2022. 54% of businesses in this sector experienced growth in their UK sales - evidence of further progress since the bleak statistics of 29% and 33% recorded in the third and fourth quarters of 2022 respectively. Improvement in domestic sales was strongest amongst services firms, with an increase of 5 percentage points on last quarter to 49%; however, as an overall figure it sits slightly below the average across all sectors. This is also the case for the balance score, which sits at 66 which is 3 points behind the cross-sectoral total, although this is gently climbing following three consecutive quarterly falls throughout last year.

In terms of advance UK orders, the overall balance score went up by 4 points to 68, with a seven-percentage point rise in firms noting an increase in their domestic bookings and orders (from 42% to 49%). 46% of manufacturing firms and 47% of services firms have increased their advance orders, bringing the balance scores to 73 and 66 respectively. The positive trends revealed in this quarter’s survey are reflected in national GDP monthly estimates from the ONS, although there is evidence of more sustained progress across Greater Birmingham than the national economic landscape. The national monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in April 2023, after a fall of 0.3% in March 2023. The positive statistics in the services sector reported above for Greater Birmingham are also reflected in ONS data – it has been reported that, on a national level, the services sector grew by 0.3% in April, recovering from a fall of 0.5% in March, this being the main contributor to GDP growth. National manufacturing figures, however, have turned out to be less encouraging. Positive trends in production and construction recorded in March were reversed in April with respective output decreases of 0.3% and 0.6%.

PRICE PRESSURES & EXTERNAL FACTORS

In Q2, 45% of businesses expect the price of goods and services to rise over the next 3 months, which is down 5 percentage points on Q1, whilst 53% expect prices to stabilise, in contrast to 47% recorded three months ago. This quarter’s results mark the first time since Q3 2021 that more respondents expect prices to remain the same as opposed to going up. Looking at the reasons behind these results, there is evidence that labour costs are an ever-growing challenge for businesses, having been cited by 37% of respondents. Additionally, firms continue to struggle with utility costs, as mentioned by 29%, although it is encouraging to see the recent prominent concerns about inflation begin to ease off, with a 4-point decrease on last quarter to 33% - the lowest recorded figure since Q1 2022.

Although inflationary concerns appear to be easing in Greater Birmingham, a comparison between national Consumer Price Index (CPI) forecast and actual figures demonstrate lingering economic volatility. Although economists had forecast 8.4% inflation, actual figures showed no change between April and May 2023, remaining at 8.7%. The unexpected upswing in this figure is said to be attributed to rising prices for air travel, recreational and cultural goods and services, and second-hand cars, whilst downward contributions mainly originate from a fall in the price of petrol and diesel. The core CPI (excluding energy, food, alcohol and tobacco) rate is of particular concern, having risen from 6.8% in April to 7.1% in May – indicating that fears of a furtherprolonged period of high inflation are materialising. The annual CPI rate for goods fell to 9.7%, a 0.3% decrease, whilst an increase from 6.9% to 7.4% was recorded for services.

The balance score for domestic sales has risen 2 points – the second consecutive quarterly increase since a sustained fall throughout 2022.

The price index balance score saw a welcome 2-point fall to a figure of 72 but is descending from a high point seen consistently throughout 2021/2022.

score rose by 11 points this quarter to reach 62 – the highest figure recorded since Q4 2018.

The significant rise in the balance score is echoed by an increase of 11 percentage points for firms reporting higher levels of export sales (from 22% in Q1 to 33% in Q2). It is, however, important to note that strong evidence of an uptick in exports is overshadowed by a more compelling trend of constancy in this regard. 57% of businesses express that their export sales have remained constant throughout Q2, with no change on the previous quarter, although it remains at an elevated level seen since Q1 2022. An interesting trend can be observed for manufacturing firms whereby a figure of 48% is recorded for those businesses that have both increased and maintained their levels of exports, thus marking a quarterly balance score increase from 57 to 72. In services, there has been a 9-percentage point rise in the number of firms reporting an increase in export sales, whilst 62% cite that they have remained the same, and 16% have experienced a decrease in services exports – 6 percentage points higher than the broader multi-sectoral average of 10%.

Looking at advance export orders, 37% of businesses have seen an increase throughout Q2, up from 31% in Q1, with proportions of respondents reporting stability in export orders rising from 52% to 56%. Arguably, changes in these measures contribute to closing the gap of those citing decreases in advance sales to overseas, which dropped by 11 percentage points to only 7% and the lowest figure seen for five years. Similar trends are evidenced in the manufacturing sector, which reported an uptick in the number of firms noting increases and stabilisation in their export sales (46% and 50% respectively), and only 4% noting a decrease. For service providers, 32% cited experiencing an increase in orders from overseas, up from 26% in Q1, leading to a 6-point rise in the balance score to 62.

Nationally, ONS data from April 2023 shows that the total trade in goods and services deficit narrowed by £12.6bn to £12.3bn in the three months to April 2023, propelled by a larger fall in imports (of £16.2bn) than exports (which saw a fall of £3.6bn). Both imports and exports of goods displayed an increase in trade with non-EU countries, though trade with EU countries fell. This accelerated trade outside of the single market coincides with the inception of the UK-Australia Free Trade Agreement on 31st May 2023 – marking the first completed trade deal since the UK’s departure from the EU.

WORKFORCE & RECRUITMENT

The workforce balance score fell by 3 points to 59 – returning to levels seen in mid-2022

Statistics on the size of respondents’ workforces have remained largely stable between Q1 and Q2. Those citing an increase in their number of employees has fallen 3 percentage points to 29% this quarter, reports of no change to workforce size remains at 60%, and 11% responded that their workforce has decreased in size. Recruitment difficulties persist at the relatively high levels seen over the last three years of economic uncertainty, with 68% of those who have attempted to recruit citing a struggle to find suitable staff – the same figure as Q1. Labour market challenges have been felt acutely in the manufacturing sector this quarter, with a sharp drop in the number of firms increasing their workforce (52% in Q1 to 37% in Q2), leading the balance score to fall from 73 to 62. Manufacturers experiencing recruitment difficulties has risen by 9 percentage points to 78%, which is heavily attributed to challenges in finding skilled manual/technical staff, as cited by 59% (rising from 45%). For the services sector, there have been minimal changes on Q1’s figures. 28% of services employers report increasing their workforce and 62% state that this has remained constant, only a 1 point decrease on the previous quarter, and a 2 point rise to 10% in firms with a decrease in their workforce.

61% OF FIRMS ATTEMPTED TO RECRUIT OF WHICH 68% FACED RECRUITMENT DIFFICULTIES

Regional labour market statistics reveal that whilst the West Midlands employment rate has increased by 1.6 percentage points between February and April 2023 to 75.6%, the unemployment rate has also increased by 0.3 percentage points to 4.8% - meaning that the West Midlands (joint with Wales) has the highest unemployment rate in the UK. Many of the fundamental factors behind these long-term structural challenges have been examined as part of the West Midlands Local Skills Improvement Plan which explores the provision of post-16 education and training, and the important roles that local businesses can play in shaping this landscape. The GBCC has worked closely with Chambers across the WMCA area and Warwickshire to undertake this research – visit our website for more details.

The export sales balance

The balance score for turnover has increased for the third consecutive quarter, reaching 78, a welcome recovery from the sharp 9-point drop in Q3 2022. The number of firms expecting to see an increase in their turnover in the next 12 months has increased 3 percentage points on last quarter to 65%, those expecting no change in this area has remained at 25%, and only 10% are anticipating a drop in turnover. In terms of profitability, the balance score increased 3 points to 71 – a positive indicator of business confidence which is also reflected in the number of businesses expecting to increase their profitability over the next year, rising from just over half to 58%. 26% anticipate that profitability will remain the same, and 16% foresee a decrease.

Although the increased business confidence described above is encouraging, it does not appear to have translated into convincing increases in businesses’ investment plans. The balance score for expenditure on training over the last 3 months has stabilised at 62, with only a one percentage point increase in the number of firms reporting that they have recently spent more in this area. 57% state that training expenditure remains unchanged, whilst 10% have invested less. The balance score for capital expenditure for equipment fell to 51 following Q1’s peak of 58 which was the highest figure since Q4 2018. Just over a fifth (22%) cited an increase in spending on equipment, -a 6-percentage point fall from the previous quarter,- 57% say this is unchanged, and 11% have spent less.

Raj Kandola

Director of External Affairs Greater Birmingham Chambers of Commerce

In June, the Department for Business & Trade revealed that across the 2022-23 financial year, the UK attracted 1,654 Foreign Direct Investment (FDI) Projects – up 4% on 202122.However, job creation from these projects was down 6.1% from 84,759 to 79,549 in the same period. Within this data, it was reassuring to see that the West Midlands continues to thrive and buck the national trend. In particular, the West Midlands saw the highest year on year growth in terms of FDI projects, going from 143 in 2021-22 to 181 in 2022-23. In addition, the number of jobs created from these projects went up from 5,571 to 8,252 – a rise of 48.1%.

Of course, much of this was predicated on the success of the Birmingham 2022 Commonwealth Games which is no surprise given the broader economic benefits this once in a generation event brought to our region and further afield. Data published in January this year revealed that the Commonwealth Games had already contributed £870m to the UK economy, 9.000 full time equivalent jobs were supported in 2022 and a record 1.5 million tickets were sold for the sporting extravaganza. Whilst the Games acted as a catalyst to spur further investment, it’s clear that the West Midlands’ industrial heritage, diverse workforce and world leading education institutions all play a part in enhancing our attractiveness as a destination of choice for investors both home and abroad. It is essential that we build on the legacy of the Games to unlock longterm economic growth and harness the momentum generated from that never to be forgotten summer of 2022.

The balance scores for turnover and profitability have continued their upward trajectory as business confidence continues to build despite the broader economic uncertainty locally and nationally.

The region must harness the positive sentiment which is starting to build despite the day to day challenges our firms continue to face.

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 Greater Birmingham Global Chamber of Commerce).

Members range from young professionals to SMEs and large, high-profile organisations, including 39 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 healthrelated 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.

Quarterly Business Report

If you have any further questions on the report, please contact Gemma Dilkes on G.Dilkes@birmingham-chamber.com For more information, go to greaterbirminghamchambers.com.