Our economy 2022: Cost of doing business

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Our Economy 2022 : Cost of doing business

Data on how worker shortages, energy prices and international trade are affecting businesses in the North East

Introduction

Rising inflation has been affecting businesses as well as households across the North East, driven by worker shortages, energy prices and global disruption to international trade.

This page uses a range of data sources to provide a holistic picture on the challenges facing businesses in the North East in the current economic climate. These data sources include the business insights and conditions survey, an innovative survey from the Office for National statistics started to provide economic data during the Covid-19 pandemic.

This survey gives rapid insights into the challenges faced by businesses in an economically uncertain time.

Other key data sources used include consumer price inflation, data from Ofgem on the price of gas and data from the Bank of England on their base interest rate and exchange rates.

Business environment

There has been a high level of uncertainty in the North East's economic environment post Covid-19, presenting both challenges and some opportunities for the region’s businesses. Many of these challenges are related to the significant increase in inflation seen in the UK since 2021. The Consumer Price Index reached 10.1% in September, which has a range of implications in terms of how businesses need to cost their inputs and align their prices. In response the Bank of England has also increased the bank interest rate to 3% to try to move inflation back towards their 2% target^[1]. This is the highest rate since the 2008 financial crisis and will impact the availability of business loans as well as the costs of interest payments for businesses.

The cost of labour (30%) and materials (36%), and economic uncertainty (37%) were the most common challenges impacting businesses’ turnover in the North East, reflecting the underlying causes of the inflation seen in the UK. Of businesses that are considering raising prices in the North East, 45% say this due to energy prices, 34% raw material prices and 32% due to labour costs.

^{^}Bank of England, Monetary Policy Report - November 2022

Worker shortages

Part of the reason there has been such an increase in inflation in the UK is there has been a significant shortage of workers post Covid-19. This is a particular problem in the North East where economic inactivity, already high prior to Covid-19, has increased significantly. 41% of businesses in the North East say they are having recruitment difficulties, with the most common reasons given amongst these businesses being low numbers of applicants (62%) and a lack of qualified applicants (56%). In part due to these difficulties wage inflation has been increasing in the North East along with in the rest of the UK.

Energy prices

Another catalyst of inflation globally has been an increase in energy prices, partly but not exclusively due to the Russian invasion of Ukraine^[1]. This has implications for energy intensive businesses such as those in manufacturing, who are facing a significant increase in costs, both in terms of inputs but also in terms of logistics. The price of diesel has increased by 32% since last year, while the price of petrol has increased 23%.

While this is undoubtedly challenging for many businesses there are opportunities for the Energy price shock to help accelerate the North East in its transition to Net Zero. 23% of businesses in the North East say they have changed to energy efficient equipment because of the increase in energy prices, and 20% have switched off equipment more than usual when it is not in use, although more businesses still say they have not taken actions to mitigate the effects of price increases (28%).

^{^}Bank of England, Monetary policy report - November 2022

International trade

Another significant change in the international environment has been the relative value of the British pound to the US dollar, which has altered the relative costs of imports and exports for North East businesses and been a contributor nationally to price inflation. This does bring some positives to the North East, which as a region with a high value of exports per head may benefit from exports becoming more competitive. Especially as the US is the second largest market for North East exports after Germany. This may also make the region more attractive for foreign direct investment (where the North East has already been performing well in recent years).

However, it must also be noted that most exporters in the North East are also importers, and many inputs from abroad have had their prices affected by exchange rates, supply chain issues and global inflation.