The futility of predicting 2022
Even Nostradamus would have struggled to get his economic forecasts right for 2022, although there were straws in the winter wind with consumer inflation already heading north at 5.4% as we started the year and Russian troops were massing on the Ukrainian border. Oil prices had already gained 50% in 2021, so surely it would be stable from its year end $77 a barrel and after all, the Bank of England interest rate was still only 0.25%, sterling was a manageable $1.35 and the average household energy bill was just over £1,000 per annum.
Who could have foreseen the outbreak rather than just a threat of major war in Europe and its catastrophic impact on global energy and commodity prices, never mind three UK Prime Ministers, four Chancellors and probably the most disastrous Budget in modern times? Nor could we have predicted that the futile Zero-Covid strategy in China would extend the mass disruption of international supply chains for a third full year.
Where we are going into 2023
We ended 2022 with the base rate at 3.5%, inflation at 10.7%, Brent Crude at $83, sterling at $1.21 and the economy in recession. There were wild gyrations in some of these key indicators during the year. On top of it all the labour market kept on tightening, strangling the operational efficiency and productivity of large parts of the economy. The only certainty in business life seemed to be uncertainty.
Where will the pressures be for UK businesses in 2023?
Inflation
The consensus is that consumer and business input cost inflation have peaked, but both will remain at elevated levels throughout 2023. The former makes it difficult for many businesses to pass on the latter, in a macabre dance of ever shrinking profit margins.
The cost of living crisis
The gap between rising consumer costs and pay increases will surely persist in 2023, limiting disposal incomes and threatening the sectors most dependent on consumer spending, notably hospitality, retail and travel.
Labour shortages
We go into 2023 with 1.2m figures for unemployment and job vacancies, but of course with the inevitable skill and geographical mismatches. We also have the extraordinary phenomenon of 9m people between 16 and 64 classifed by the Office for National Statistics (ONS) as ‘economically inactive’, including 2.5m unable to work because of long term illness. The resultant upward pressure on labour costs for businesses and the disruption it causes to their operations will continue in 2023.
Business energy costs
Before Christmas, the government was expected to announce the details of an extension of the existing price cap scheme for businesses, which is due to finish in April 2023. This has been postponed until January 2023, but the rumour is that the level of support will be halved, although it may be that certain highly vulnerable sectors may receive extra protection. The average rise in energy costs across the economy in 2022 was 200%, so any reduction in support will be potentially catastrophic for many businesses.
Increased debt levels and higher interest rates
Smaller businesses have taken on considerable extra debt during the pandemic, with increases of up to 200% in hospitality and retail and over 60% in construction. Servicing this extra burden was always going to be an issue, but now we have a recession and higher interest rates to make things much harder, even for larger companies.
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The Coronavirus Support Loan schemes
The signs are that these loans are proving too great a burden in an economic climate where bouncing back is extremely difficult. Although official government statistics for loan defaults are now seriously out of date, an FOI request obtained by Construction News revealed that 40,000 Bounce Back Loans provided to the construction sector (15% of the total) had already defaulted by October 2022.
Tougher HMRC enforcement
It is clear that HMRC are taking a tougher approach to collecting tax arrears, shown most clearly in the steady rise in winding up petitions being issued against companies since restrictions on debt enforcement were finally lifted in March 2022.
Business under-investment
The UK has long had a dismal record for under investing in business by comparison with other leading economies. According to ONS data, business investment fell by 0.5% in Q3 2022 and was still 8.4% below pre-pandemic levels in Q4 2019. Without investment, UK productivity will continue to lag and GDP growth will be difficult to restore, never mind sustain.
Business failures
There were 19,132 company insolvencies in the UK in the first ten months of 2022, which indicates a final total for the year of some 23,000 failures and the second highest annual figure on record. With the economy in recession and so many negative factors affecting business performance and financial viability, the figure will be higher in 2023, especially with tougher HMRC enforcement and as the Bounce Back Loan default rate translates into more failures.
These failures will be a tragedy for business owners and their staff, but for stakeholders such as customers, suppliers and landlords there will be business interruption and losses to be dealt with.
Strategies for surviving and thriving in 2023
2023 will need to be all about commercial and financial discipline. This means not taking unnecessary risks and reaching out for expert help as soon the going starts to get tough. There will be winners, especially those who resist the temptation to boost revenue by cutting margins ever closer to the bone. Controlling debt or hoarding cash will be essential strategies, which in turn means being constantly on top of cash collection and unnecessary expenditure.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.