October economic and business overview
October 2, 2023
In this monthly update, we take a closer look at the latest UK economy stats and discuss what they may mean for UK businesses in the coming month.
However much the Office for National Statistics fiddles about revising past GDP numbers by a few tenths of a percentage point, the reality is that the UK economy is bumping along the bottom as we head into Autumn and the key festive trading period. GDP was down 0.5% in July but up a marginal 0.2% for the quarter to then.
Is a recession likely?
The British Chambers of Commerce revealed survey results showing that 61% of consumer-facing businesses were being negatively impacted by higher interest rates, while both the well-respected S&P Global Purchasing Managers Index and KPMG suggested that the UK was likely to experience a shallow recession later this year and through well into 2024.
Decades of business underinvestment
Probably the most important factor underlying this sluggish performance is our poor record on business investment, which has been an average of 36% lower than other members of the G7 since 1990 according to a report published this year by The International Monetary Fund (IMF).
Looking at the latest disruptions caused by Brexit, the pandemic and the invasion of Ukraine, the IMF also confirms that real-terms business investment in the UK had settled at a slightly lower level by the end of 2022 than in 2016 while other G7 economies experienced a 14% increase on average over this period.
Read more on the barriers to more vigorous investment here.
Inflation, unemployment and an interest rate pause
These facts are all available to the Bank of England’s Monetary Policy Committee, so no wonder they took advantage of a surprise but miniscule improvement in inflation in August to hit the brakes on interest rate rises. Maybe the soaring unemployment numbers (up from 3.8% to 4.3%) and the fall in job vacancies were also on their minds.
They may also have noted the surge in business failures in August, up a third on July and by two thirds since pre-pandemic in August 2019. At the current rate, there will be 26,000 corporate insolvencies in 2023, making it the second worse year on record.
The pandemic prompted an unprecedented splurge of borrowing by corporates, taking advantage of the various loan schemes guaranteed by the government. By the time the this ended in May 2021, a third of UK businesses (1.7m) had taken on £79.4bn of extra debt. £47.4bn of this went on the balance sheets of SMEs through the Bounce Back Loan scheme.
Repaying these obligations is straining cash flows and may be another cause of lagging business investment. The evidence suggests that debt levels are falling. Figures from the Bank of England confirm that SMEs repaid £5.3bn in H1 2023 and have now paid back a total of £21.4bn since the start of 2021.
Nevertheless, our recent report into the hard-pressed hospitality industry shows that while the debts of all but the smallest businesses have fallen in the past year, they remain very substantially higher than before the pandemic. Companies with total assets between £25k and £99k have debts 2 times higher, while micro entities with assets of less than £25k have debts 3 times higher. This pattern is likely to be repeated across many other sectors.
Business rescue on the ground
How is all this playing out at the sharp end, with embattled and struggling companies and their battle-weary owners and managers? The consensus around the business rescue and insolvency profession is that while formal insolvencies are rising sharply, too many businesses with serious financial problems are holding off from taking action.
The profession is exceptionally busy providing advice to business facing this situation but they are finding that owners and managers are holding off taking decisive action. Experience shows that the longer decisions are delayed, the worse the outcome for stakeholders and the less the chance of saving the business and the jobs of its employees.
Looking out for the warning signs
Times are tough right across the economy and likely to get tougher over the next year or so, but businesses do have options available to them if they are in distress. The sooner this is acted on the more options that will be on the table.
Business distress can come in many forms, with some key indicators being:
- Cash flow problems
- Increased debtor days
- Continual arrears and unmanageable debt
- Negative balance sheet
- Sales pipeline issues
- Significant budgetary constraints
Business owners and directors facing these difficulties should seek expert advice as soon as possible. The sooner business recovery and turnaround plans can be put in place, the better.
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.