Businesses are starting to feel the pain of falling demand and continued increase in input prices

In a recent webinar, our CEO Dave Dunckley was joined by a panel of experts as they gave their initial reactions to the Spring Budget announcement and thoughts on how you can respond. Here, they highlight areas you can focus on to mitigate the impact of falling demand and position your business for success.

Five tips for success:

Economic climate: where are we now?

The current economic climate in the UK is cautiously optimistic, as announced by the Chancellor Jeremy Hunt in the Spring Budget. The Office for Budget Responsibility (OBR) forecasts have exceeded expectations, with a projected -0.4% contraction in Q1 2023 and an overall contraction of -0.2% for the year, indicating that the country is unlikely to experience a technical recession. However, businesses should still be prepared to manage a fall in demand, with the OBR forecasting a consumption drop of 0.8% during 2023.

The OBR’s forecast for the headline rate of inflation (CPI) was one of the biggest surprises in the Budget, with a reduction from 10.7% to 2.9% expected by the end of 2023. Although businesses can be quietly optimistic, there is still a delicate balancing act to maintain public sector wage increases and progress on inflation, while public sentiment may test the government's resolve. Business costs are also largely driven by the Producer Price Index (PPI), rather than CPI, and that is likely to remain stubbornly higher in the near term.

Businesses dealing with declining customer demand and rising costs have a number of options available to them. Passing through costs in the form of higher prices is difficult when demand is falling, so they will need to consider absorbing these by accepting a lower profit margin, reducing operating costs and delaying investment.

In the latest Business Outlook Tracker, our bimonthly survey of 600 mid-market leaders, businesses told us that they are looking to decrease investment in workforce, digital and ESG – a change in the messages they were giving us in 2022. Despite this, businesses should be mindful of recruitment and retention challenges in the shorter and longer term and the need to be able to “bounce back” strongly from the economic downturn when demand returns.

The government has announced plans to encourage the economically inactive back into work and to provide training and development, particularly in sectors that face the biggest recruitment challenges.

Also announced were the government's new investment zones where areas that make a successful application will be given access to £80 million of support over five years. Businesses should look to see how they can access the benefits of these as well as work with local authorities to access levelling up funds that have been allocated. These are both good ways to mitigate the fall in consumer demand.

Businesses should maximize on this government support and take a holistic approach, embracing technological innovations, increasing operational efficiency, and investing in employee skills, to navigate this difficult terrain.

Although the UK is not yet out of the woods, there is a pathway to an optimistic future. Here's five ways businesses can position themselves for success not just in the short term, but also in the long term.

“A cost-of-living crisis can pose significant challenges for businesses, but there are strategies they can adopt to navigate this difficult terrain. From embracing technological innovations to increasing operational efficiency and investing in employee skills, businesses must take a holistic approach.”

Schellion Horn, Economics Partner and Co-Head of Economics Consulting, Grant Thornton UK LLP

1 Maximise the use of tax reliefs and subsidies available

Businesses from various sectors were anxiously anticipating government support to navigate through the waters of the current choppy economic climate. According to the latest Business Outlook Tracker survey, 77% of respondents expressed confidence that the government would provide the required support for businesses in the Spring Budget.

What we saw was a Spring Budget with a focus on growth, with measures intended to encourage those who have left their jobs to return to the workforce and to boost business investment. Pension reforms and childcare provision could both help businesses facing talent shortages. The government is clear that bolstering the workforce is a key focus area to help boost economic growth.

Predictably in light of the current economic environment the government is still somewhat cautious around tax cuts and the Chancellor was focused and careful in where he gave support. There were some investment led tax decisions including the new full expensing for qualifying plant and machinery to replace the super-deduction and some very focused additional SME R&D relief (27p in the £1 for loss-making R&D intensive companies). There are other valuable incentive reliefs still available too and we would urge businesses to capitalise on tax reliefs and other support available to them to alleviate the impact of the current economic environment. These might include:

  • Capital allowances – in addition to the full expensing announcement, it was also announced that 50% special rate allowances will continue to 31 March 2026
  • Use of Apprenticeship Levy to expand and upskill workforce
  • Wider R&D tax support
  • Investment zones (these are to be rolled out and not in place yet)

In our latest Business Outlook Tracker survey, when asked about what policies would be most useful to businesses, the top two were:

  • Measures to level-up our economy, with more devolved powers across regions
  • Incentives for employers to invest in skills attraction and development

The Spring Budget had a real focus on “levelling up” to boost regional growth and development, and that focus will continue as we head into the next election. Read our full response to the Spring Budget to learn more about the measures announced.

“As a business leader, you have a responsibility to make the most of government subsidies and tax reliefs that can support your business during challenging times. From capital allowances to the R&D tax regime, these incentives exist to stimulate investment, innovation and growth. Don't miss the opportunity - be proactive, seek advice, and make the most out of these incentives to strengthen your business, support your people and emerge from uncertainty stronger than ever.”

Karen Campbell-Williams, Head of Tax, Grant Thornton UK LLP

2 Make tough decisions now to set yourself up for the future

Creating the right kind of business for the future requires making tough, informed decisions now. While it's crucial to act quickly and avoid being paralysed, it's equally important to consider the outcomes of the decisions made and who will want to work with and for your business in the future. The question is, how do you want to emerge from these challenging times?

Geopolitical uncertainty has had a significant impact on businesses, and it is currently at its worst in at least 40 years. To navigate this difficult time, businesses must remain agile and have a culture of change readiness. Inclusivity is critical, and businesses need to ensure they are the type of company people want to work for and do business with.

Although the supply of people is easing, the supply of talent remains challenging. Staying close to people and potential recruits in terms of what kind of working life they want is necessary.

Hybrid working, flexibility, and agility are key components. At Grant Thornton, we have invested more in our people during this time and will continue to do so. 

We have decided to invest in our physical built environment, digital environment, and emotional environment. This investment includes wellbeing and psychological safety at work. Employees' wellbeing is a significant concern, especially if they are worried about paying their bills.

“At Grant Thornton, we believe in investing in our people, our physical environment, and the digital tools necessary to enable the best possible work. By making strategic investments now, we are positioning ourselves to be a strong and successful business in the future.”

Dave Dunckley, CEO, Grant Thornton UK LLP

3 Adapt to regulatory and market changes, keeping ESG at the forefront

As the focus on environmental, social, and governance (ESG) issues continues to grow, businesses must adapt to regulatory and market changes and keep ESG at the forefront of their operations.

Key to success will be the alignment of a business’s ESG priorities with its purpose and culture. In addition, it is critical that the ESG strategy clearly frames the focus of the business and is firmly embedded into the core business strategy. Selecting a few well communicated ESG priorities, along with identifying appropriate metrics and KPIs, while setting targets aligned with compensation structures, will focus the business and support it in achieving its ambition.

When determining the level of ambition regarding ESG, businesses need to decide whether they want to be a leader, a follower, or simply meet the minimum compliance requirements. However, just doing the minimum may not be enough to avoid negative consequences, and it's essential to remain vigilant and stay ahead of the curve.

Engagement with stakeholders, including employees, investors, suppliers, and consumers, is crucial to identifying ESG priorities and ensuring that these are integrated throughout the organisation. It's important to note that ESG is not just a set of compliance measures, but a comprehensive strategy that can help businesses remain relevant and competitive in the long term. By prioritising ESG, companies can build trust with stakeholders, attract investors, talent and customers, and create sustainable value for all.

Ready to take the next step in your ESG journey?

Sign up and be the first to take the ESG Maturity Index assessment when it goes live mid-March. Start implementing best practices that will help your business thrive in a sustainable future.

4 Embed sustainable finance into your ESG strategy

Our H2 2022 International Business Report, a survey of around 10,000 mid-market businesses globally, showed that mid-market firms are becoming increasingly aware of the benefits of embedding sustainable finance into their corporate ESG strategies.

The UK results found that 1 in 4 (25%) of mid-market firms currently have a sustainability-linked loan (SLL) in place or are in discussions with lenders regarding a SLL, and nearly 1 in 3 (31%) will consider an SLL when they plan their next debt raise/re-finance.

This is encouraging and illustrates how momentum is building in the mid-market around ESG – however, these figures still show there is some way to go in the mid-market before sustainable financing is fully embedded as part of a firm’s ESG strategy.

Although management are facing many competing priorities in the current economic climate, it is important for mid-market leaders to continue to focus on sustainable financing for several key reasons:

  • Most lenders have an ESG strategy to extend sustainable finance to the mid-market: our survey over 40 mid-market lenders in 2022 found that 57% have an ESG lending strategy for mid-market companies, and this figure is constantly increasing
  • ESG plays key role in lenders’ credit processes: ESG considerations are becoming hardwired into lenders’ credit risk assessments. Our research has found that 85% of lenders claim that a firm’s ESG status, or its ability to transition to net zero, influenced their credit risk assessment
  • Sustainable financing is part of a firm’s ESG strategy: tying sustainability goals to your funding is a powerful way to demonstrate to your lenders, investors and other stakeholders how seriously your business takes ESG
  • Lenders will be required to report on scope 3 emissions: once proposals from the ISSB come into effect, lenders will be required to disclose their Scope 3 emissions, increasing the pressure on lenders to ensure their borrowers have effective ESG strategies place
  • ESG is increasingly a factor in winning contracts: with 75% of global annual revenues are now generated by listed firms with net-zero targets, the mid-market companies that feed these supply chains are being asked to demonstrate they can meet these ESG expectations.

Lenders are increasingly prioritising ESG in their investment decisions for the mid-market, and sustainable finance is integral to this process. So, even in a period of economic downturn, it is important for business leaders to keep sustainable finance at the top of your agenda.

Sustainable finance: a priority for the mid-market in 2023

Just a short time ago, sustainable financing was dominated by large, listed corporates, but momentum is now building in the mid-market.

5 Consider international expansion as a growth strategy

It is important to consider opportunities for growth beyond domestic markets. While expanding into international markets can be challenging, it can also offer new opportunities.

One important factor to consider is the resilience of your suppliers overseas. It is crucial to understand their ability to weather economic shocks and to have contingency plans in place to mitigate any disruptions in the supply chain.

Digital transformation is an area where we have always struggled in the UK. There was a leap and bound during Covid where we, and the government, were forced to “go digital” but that momentum is now slowing. We need to keep up that progress if we are to close the productivity gap that has emerged with other developed economies and to have a healthy and growing economy.

In addition, businesses should look to thriving international markets for potential growth opportunities. This may involve setting up sales functions, joint ventures, or alternative supply chain options in those countries.

However, entering new markets can be complex and businesses may benefit from external support to effectively navigate the process. You must seek out the correct information, support structures, and market intelligence to move into international markets with confidence.

"As the global economy continues to shift and evolve, it's essential for businesses to explore opportunities for growth beyond their domestic markets. Thriving markets exist all over the world, and businesses must be prepared. By understanding the sales opportunities in new markets, the resilience of your suppliers overseas and adapting your approach to different cultures and regulations, you can unlock new streams of revenue and set your business up for long-term success.”

Robert Hannah, Head of Large Corporate and Government Advisory, Grant Thornton UK LLP