The Grant Thornton International Business Report is a survey of mid-market businesses. The research takes place twice a year and involves online and telephone interviews with around 10,000 businesses across 29 economies.

Co-head of Economic Consulting at Grant Thornton, Schellion Horn, discusses what we’ve learnt during the first six months of the year, including key economic outlooks, the views and expectations of the global mid-market, and where the UK sits on the global scale.

What has the first six months of 2022 taught us?

After an optimistic end to H2 2021, there are signs that uncertainty and caution are beginning to set in once again. The proportion of UK mid-market businesses feeling optimistic about the UK’s economy over the next 12 months has fallen by 10pp to 59%. 

The spikes in optimism in H1 2021 (68%) and H2 (69%) may be attributable to the loosening of Covid-19 restrictions, lack of awareness of the Omicron variant, and messaging from the UK government that the country should “learn to live” with Covid.  

It is worth noting that business optimism hasn’t been as high as it is in H1 2022, since H1 2016, when it was 59% and crucially, was prior to the Brexit vote. This implies that while businesses are as optimistic as they were six years ago, the environment in which they’re operating has changed.

This trend is mirrored in other indicators; the proportion of businesses expecting an increase in revenues over the next 12 months declined by 2pps but remains high at 60%. The proportion of businesses expecting an increase in export revenue was also down 2pps to 46% and those expecting to see an increase in profits was down 5pps to 55%. 

Given the many challenges facing businesses, it is surprising that although we are starting to see a decline in confidence, generally there are still high levels of optimism. 

What are businesses most concerned about?

With Covid-19, allegedly, no longer something businesses should be overly concerned about, attention has turned to other disruptions; inflation is expected to reach 11%, war in Ukraine is impacting the supply of energy leading to increased global energy prices and the UK is suffering from a restricted labour market post-Brexit, resulting in a skills shortage across the country.

For businesses, some of these challenges, like inflation, may be more familiar than others and might go some way to explaining why the outlook indicators remain as high as they are. On the other hand, the impact of full Brexit and the war in Ukraine are only starting to be understood and may explain the decline in the indicators. 

Our most recent survey told us that the two main issues UK businesses are concerned about right now are: 

The rising cost of inflation

Inflationary costs have built up globally and UK businesses have seen larger increases than the global average across all key metrics, including wages, raw materials, transport and particularly energy costs. 

In a bid to manage inflation, the Bank of England has already increased interest rates and will likely increase them further before the end of the year. For the UK government, this will put additional pressure on public sector wages and attempts to control this situation may result in increased strike activity over the coming months. 

The big challenge in both the public and private sector will be whether it’s feasible to maintain low pay rises or if they will face pressure to award higher pay rises, which will also make inflation harder to control. 

Below inflation pay rises will also have a significant impact upon consumer expenditure and household budgets which, in turn, may lead to a recessionary environment. 

ESG will remain a priority for retailers who will need to navigate consumer spending pressures, legislation and reporting requirements, alongside growing investor activism. Business leaders have a short window of opportunity to take the lead on issues such as CO2 emissions, fair pay, packaging and waste, otherwise their actions will be forced by government regulations that will likely prove more costly in the long run.

Grant Thornton UK’s The Cut Back Economy Report 

Energy concerns have become more prevalent, partly as a result of the war in Ukraine. 27% of UK businesses said that their energy costs had gone up over the past 12 months, compared to 20% globally. Conversely, the proportion of UK businesses reporting energy costs as a major constraint dropped 4pp to 53%, this is against the global trend and is a result of the UK importing less energy than other countries. As the impact of the cost-of-living crisis becomes more keenly felt, time will tell if the UK is heading for a winter of discontent.

Top ways in which businesses are tackling inflation; Taking steps to improve internal efficiencies, costs and/or reduce waste (38%), Taking action to limit external cost increases (32%), Changing our pricing strategy so it’s more in line with cost increases (32%), Improving our understanding of the true cost to serve clients (29%)

The UK remains a tough operating environment for businesses with energy costs, inflation, wage growth and interest rate increases. Although respondents to our survey say they plan to deal with this through efficiencies and price increases, the cost-of-living crisis will mean that it is harder to pass on cost increases as planned. In some consumer facing businesses, we are already seeing disputes over who should pay for increased cost prices lead supply shortages and empty shelves.

Ongoing skills shortages

Employment is an increasingly complex and challenging issue for UK mid-market businesses. Our latest survey found that employment intentions were down 3pp to 53% in H1 2022, but remained significantly above pre-pandemic levels. While this appears to be positive and is above employment intentions globally (50%) and in the EU (40%), it also goes against the challenges that are unique to the UK. 

Post-Brexit, the employment market in the UK is incredibly tight, with the Office for National Statistics (ONS) reporting a national unemployment rate of 3.8%, the lowest it’s been since 1974. From a skills perspective, 56% of businesses said that the availability of skilled workers was a major constraint. 

Although there is some commitment to increasing investment in staff skills, this had declined by 7pp to 58%, suggesting that businesses may view it as an expense that can be reduced.

120x120-justin-rix.png“Investment in employee skills is not only good for retention and growth of new skills demanded by the digital economy, but also for wellbeing, social mobility and can encourage long-term employee loyalty and progression. Growing workforce loyalty during the great resignation is a must to succeed.”
Justin Rix, Partner, People Advisory, Grant Thornton UK LLP 

A tight labour market will put an upward pressure on wages. 57% of survey respondents said that labour costs were a major constraint to business and although 87% of businesses were expecting to offer employees a pay rise in the next 12 months, only just over a quarter (27%) were expecting to offer employees a pay rise that was above levels of inflation. 

What does this mean for businesses? 

As recent months have demonstrated, the UK is once again amid rapidly changing set of circumstances. The combination of these events, along with instability within the UK government, means that businesses will continue to face challenges. We expect business optimism will decline as a result.

Businesses need to look inward to their own resilience, and be ready for change

  • It will be harder than ever to recruit
  • There will be even more pressure on wages
  • And increased pressure on input prices
  • There will be falling demand as we head gradually into recession and the cost-of-living crisis
  • Most firms will be protecting or improving margins by raising selling prices, in line with global trends

Both inflation and the skills crisis will lead to increased uncertainty and declining optimism. This is problematic for the UK as businesses will stop investing which will impact opportunities for growth. For the UK government there are numerous challenges to address. Until the Conservative Party elect their next leader, and the country’s next Prime Minister, there will be hesitancy over key issues for businesses. 

Taxation has featured heavily in the leadership debates and although tax cuts could allow the UK to grow its way out of recession, this will have to be balanced against paying off rapidly growing national debt. It is also worth noting that whichever candidate wins, could have a significant impact upon inflation, which will rise to facilitate some of the tax cuts promised. 

It’s clear that whoever the next incumbent of Downing Street will be, they must address challenges on numerous fronts before they can start to deliver on leadership pledges or the wider manifesto. 

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