Blogs UK Small Business Confidence is Recovering

UK Small Business Confidence is Recovering

British economy

12th May 2023

Dexter Lawrence Written by Dexter Lawrence

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The FSB surveyed almost 700 people for its latest quarterly report. The industry body represents more than 150,000 business owners, sole traders and self-employed workers in many industries across Britain.

However, despite some business owners feeling more optimistic, around 90% said their operating costs were higher than in the same period in 2022. This is mainly due to the energy crisis, with soaring utilities costs putting a huge strain on business finances.

Will there be a recession?

Back in January, economists predicted a recession on the horizon, based on data gathered during 2022.

The Bank of England suggested a "prolonged" recession would grip the UK throughout 2023 and into the first half of 2024. With inflation having risen from 5% at the start of 2022 to 11% by the end of the year, no-one could have foreseen any imminent economic recovery.

However, perhaps surprisingly, the FSB now says business confidence is being restored, as the threat of a recession seems to be abating. The economic crisis was blamed on a number of factors, including the Russian invasion of Ukraine leading to rising energy prices.

Economists have cautiously forecast business growth of 0.1% in 2023, predicting a trend for further growth of 1% during 2024 and 1.6% by the end of 2025.

In addition, Consumer Price Index inflation is expected to reduce to its 2% target by the end of 2024. Inflation had increased from 7% in March 2022 to 10.1% in March 2023, peaking at 11.1% in October 2022, according to the Office for National Statistics.

However, despite the threat of a recession having reduced since economists made their predictions in January, the FSB warns there are still "dark clouds" on the horizon. Prices are still likely to be 20% higher across the board at the end of the year than they were at the beginning of 2021.

While all regions of the UK have reported some business growth in 2023, it has been slower in the north of the country, compared with the south.

A record number of companies UK-wide have described staff wages as having "shot up". This has impacted their financial recovery, but has not dampened their optimism, with 40% of SMEs anticipating sales growth during the next quarter.

What factors are affecting the economy?

Wholesale energy prices have dropped since their peaks of summer 2022. New data released by the ONS on 5th May, for its Public Opinion and Social Trends survey, suggests the price of energy is still the biggest worry for 48% of the UK population.

Gas prices increased by 129.4% and electricity by 66.7% in the 12 months up to March 2023. This was one of the main drivers of the annual inflation rate.

Energy prices have indirectly impacted the prices of goods and services due to businesses experiencing increased costs, according to the Consumer Prices Index 2022.

According to the government document, Gas and Electricity Prices Under the Energy Price Guarantee and Beyond, published on 24th April 2023, lower wholesale prices could lead to suppliers offering cheaper fixed tariffs.

There have been virtually no cheaper fixed tariffs on offer for at least the past 12 months. While a predicted drop in prices appears to have positively impacted business optimism about the economy, analysts believe suppliers will probably remain cautious.

Even if the predictions are correct that energy prices will fall, on average, they will still be around 60% higher than they were in the period December 2021 to March 2022.

Will interest rates rise?

While small businesses are hoping for a gradual recovery, more interest rate increases from the Bank of England could slow their progress.

Economists are expecting interest rates to rise from their current level of 4.25% in the foreseeable future. This is the Bank's anticipated response to inflation remaining above 10% in March - more than five times the target rate of 2%.

Increasing interest rates is a tactic used to bring inflation down. It is something of a double-edged sword. It spells bad news for borrowers, as it means higher costs on loans, credit cards and other lending.

Consumers will start to spend less money, because they can't afford it. This leads to the demand for goods and services falling. In turn, this causes inflation to fall, producing a more positive outcome in the longer term.

What is the Business Index?

The FSB uses the Business Index to form a snapshot of the current state of the economy for mainly small companies. The data-driven analysis shows changes in the overall performance of UK SMEs on a monthly basis.

The latest reading of the FSB's Small Business Index has increased by 43 points compared with the final quarter of 2022. However, this is still 18 points lower than at the start of 2022 during the same period.

While the FSB hopes small businesses are going to "turn the corner" and recover from recent events - including the Covid pandemic and the energy crisis - leaders fear the prospect of interest rates continuing to rise could hamper progress.

In addition, operating costs remain generally high for businesses in all sectors, while consumer demand is relatively weak due to a lack of money. During the first quarter of 2023, two-fifths of companies reported a dip in sales, although the same percentage now say they are anticipating growth.

While the outlook is more optimistic, economists believe there are still challenges out there for small businesses, with data suggesting the overall economic outlook is still one of very little growth.

Did King Charles' coronation boost the economy?

The coronation of King Charles III on 6th May, with its traditional pomp and pageantry, is estimated to have boosted the UK economy by hundreds of millions of pounds.

The cost of staging Operation Golden Orb - the event's codename - hasn't been revealed, although some media reports have suggested it may have been as much as £100 million.

However, economists suggest the boost for the tourism and hospitality industry, including hotels, pubs and restaurants, has been significant. Hotels' revenue is 54% higher compared with the same time last year.

In particular, the four and five-star hotel sector in and around London has received a massive surge of tourists. The sector was particularly impacted by the effects of the Covid pandemic, so the boost is welcome.

Flights booked to the UK had increased by 149% within one day of the coronation's date being announced, according to data from Travel Port, the bookings company.

However, ironically, the extra Bank Holiday on Monday 8th May is estimated to have caused a dip of 0.7% in the Gross Domestic Product due to thousands of people being off work.

It has been described as having "detracted from the net value" of the event, although analysts say the coronation has still been a huge positive for the British economy.

Can an accountant help SMEs?

Many businesses are using accounting services to help manage their budget effectively.

A recent survey revealed 83% of SMEs in the UK who used an accountant said this had helped to reduce the negative impact of inflation on their company. On average, they said having a professional accountant on the team had saved them £28,000 a year.

The research carried out by Intuit QuickBooks in November 2022 said small businesses were increasingly using an accountant to combat the impact of rising costs and falling consumer spending.

In addition, 93% of respondents said having an accountant reduced their stress levels, as they were no longer struggling alone to balance the books.

Many SMEs without an accountant said they didn't feel confident in their own abilities, with 35% struggling to pay taxes correctly, 31% having problems in passing financial audits and 22% unable to meet compliance checks.

Contact DL Accounts to find out more about what our financial services can do for you.

Further Reading: 5 Reasons why SMEs need an Account.