Every two months, we ask 600 mid-market business leaders across the country to share their expectations and priorities for the future.
indicated that while business optimism remains relatively high in comparison to consumer confidence, which is at a 50-year low, business leaders are aware that they need to act now in order to survive the coming months.
Perhaps unsurprisingly, the latest survey found that the number of businesses feeling pessimistic about the country’s economic outlook has doubled since August to reach 15%.
This pessimism is flowing through into a decrease in confidence around revenue growth – 59% of respondents reported feeling positive, amounting to a 16% decrease in just two months, and the second lowest score we have ever recorded.
Fifty-nine percent may still appear surprisingly high given how low consumer confidence is. This is most likely to be because many businesses have until recently been able to pass those price increases on to customers.
However, this is unlikely to remain a viable option, particularly given higher household expenditure on energy and mortgage payments from increasing interest rates. We're already starting to see the impacts of falling consumer confidence and falling real household incomes, with shoppers looking to buy less to offset price increases. For example:
Discretionary spending is expected to drop further during the winter when, with energy prices soaring, consumers’ pockets will be more squeezed.
Although many businesses have been able to mitigate the impact of increasing costs so far, the latest survey results indicate that they're aware of the need to take action to ensure they have sufficient cash flow going forwards.
Roughly two-thirds of businesses told us that they were either currently reconsidering the structure of their operations and headcount, or that they were going to do so soon.
A third have already secured additional finance, and a further 40% intend to. Fifteen percent of those surveyed felt pessimistic about their funding position, which marks an increase from 9% in August and 5% the year before that. This doesn’t bode well given that consumer spending has been holding up so far, and we aren’t feeling recessionary forces yet.
Interest rates are expected to rise further later this year and in early 2023 to a peak of 5% or more. Banks are factoring these higher interest rates into their affordability calculations and being more stringent on their lending requirements for mortgages, corporate lending, and unsecured borrowing. This is resulting in businesses being concerned as to whether they'll be extended the credit that they need to weather the recession and, if they are, whether they can afford it.
Although businesses are certainly facing a difficult winter, with the Chancellor having acknowledged that the UK is in a recession that is expected to last for much of 2023, there have been some changes that may help business leaders to prepare more effectively.
Jeremy Hunt first set out a new way forward with the Emergency Announcement and while this didn’t take us back to the pre-mini-budget situation, it did give us increased stabilisation, and the reduced fiscal stimulus had led to a reduction in some of the inflationary pressures. The Autumn Statement that followed confirmed that the current economic outlook in the UK is bleak, but the markets remained largely unmoved by the announcements and the increased level of stability remains intact.
The Bank of England is now forecasting an 11% inflation rate peak, but some analysts think we've already hit it at 10%. Inflation is expected to be below 7% by the end of 2023.
Crucially, the increased economic stability will enable business leaders to gain a better understanding of the specific challenges they'll face in the coming months.
While there's certainly no one-size-fits-all strategy to prepare for a recession, there are some key considerations that we expect most businesses will need to focus on.
In its 'Dear CFO' letter, the Bank of England advised firms to review their expected credit-loss processes. This requires developing business planning models that have the functionality to allow testing of key assumptions, eg, around inflation, interest rates, consumer demand, customer payment terms and defaults. This is important for both securing additional credit from lenders, but also for meeting annual financial accounting requirements.
Review your budget for the next 6-12 months to ensure that forward plans account for assumptions that may need to be made over this period, such as the impact of the end of the energy price cap in March, changes to consumer demand and rising interest costs.
There's a lot more certainty now around economic forecasts, so you should be able to get better predictions and really understand what your customers need, what they're they willing and able to pay for, and how can you differentiate your offering.
Businesses will need to ensure that they have sufficient working capital to be resilient in the face of declining customer demand, which means having early discussions with lenders. Don’t wait until you’re in trouble to speak with them – if you need additional financing, go to them with a set of scenarios and forecasts for next year and beyond.
We've seen companies come together through their industry forums to approach the government to discuss the actions that could be taken to alleviate the pressures they're facing.
While the government can’t support all industries, they're more likely to engage in conversations where there's analysis that suggests there's a mutual benefit in terms of supporting businesses while fostering economic growth.
In the long term, the only way we’re going to be able to boost productivity is if different parts of the ecosystem collaborate.
While many businesses are heading into a tough 2023, there's help available – particularly for those who can show a good understanding of the current economic pressures on their business and an expectation of a return to good financial health later next year.
We advise being proactive in responding to changing customer requirements, talking to lenders early on to put in place credit facilities, checking that you’re making the most of tax allowances, talking to the local council about grants, and liaising with central government, ideally through a trade association.
For more insight and guidance, get in touch with Schellion Horn.
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