British SMEs struggling with ‘a hat-trick of hurt’

Britain’s army of more than a million small and medium-sized businesses are stockpiling raw materials and ordering components six months ahead to overcome supply shortages that prevent them from meeting customer demands.

With construction costs reaching fresh record highs and import prices surging following a fall in the pound, businesses reported that much of their cash was tied up in securing the basic raw materials and components needed to supply customers.

Simon Gray, head of business at the accountancy body ICAEW, said companies were suffering “a hat-trick of hurt” that was forcing them to limit production.

“Businesses are reporting that things are so bad they cannot plan for the future. There is a breakdown in confidence and the uncertainty is changing their behaviour, making them take no risks and cut investment,”

Business groups have urged the prime minister to agree a rescue plan to support companies clobbered by rising energy and fuel costs, wage inflation and the surging price of imported goods and raw materials.

Diesel prices have rocketed to above £2 in many areas, increasing transport costs, while the 10% fall in the pound this year has raised import prices.

Brexit trade restrictions have also deterred firms from exporting to the EU and made it more difficult to import goods from the continent, according to a report last week by the Resolution Foundation.

The manufacturer’s organisation, Make UK, said its members reported widespread stockpiling to secure increasingly scarce supplies from countries like China, and to protect themselves against the prospect of even higher prices later in the year.

“Our recent reports have found that investment cash and expansion plans are being shelved because more funds are tied up securing supplies,” said the lobby group’s senior economist Fhaheen Khan.

The warning came after the CBI reported a slump in private sector activity in the UK that appeared to justify concerns Britain is heading for a recession in the autumn as high prices squeeze disposable incomes and deter household spending.

The CBI said the slowdown was broad-based across sectors, with consumer services seeing the biggest hit (-41%), marking the sharpest fall experienced by the sector since February 2021.

Looking ahead, it said private sector activity was expected to slip backwards over the next three months to -3%, where a minus figure indicates contraction.

Alpesh Paleja, the CBI’s lead economist, said: “With the post-pandemic recovery severely challenged by continually strong cost pressures, private sector activity is grinding to a halt.”

Grey said firms were placing orders for equipment and materials six months ahead to secure supplies, tying up cash that would otherwise be used to invest.

“Businesses are ordering earlier because unless they do, they won’t have anything to sell in six months’ time,” he said.

The Institute of Directors said businesses cited the UK’s uncertain economic outlook as their number one concern followed by the fallout from Brexit, which had severely hampered exports and imports from the continent.

Martin McTague, national chair of the Federation of Small Businesses, said consumers had received help, but not businesses during during the cost of living crisis.

“This genuinely feels like a scary moment for many thousands of small businesses,” he said. “The cost of a litre of petrol or diesel is just one very obvious example of the price pressures small businesses are experiencing. But it’s not just fuel – it’s energy, raw materials, insurance, staffing costs, rents, components – it’s across the board.”

Rishi Sunak said last month he would add £15bn to his package of support, including a £650 cheque to 8m low-income households. But he rejected calls to offer further subsidies to businesses.

Inflation hit 9.1% in May and is expected to go even higher before peaking at about 11% in October, according to the Bank of England.

The central bank pushed its base rate to 1.25% earlier this month, its highest level since January 2009.

Interest rates must be raised “quickly and decisively” to prevent the surge in inflation hitting most countries in the world from becoming entrenched, according to the central bank umbrella body, the Bank for International Settlements (BIS).

The Swiss-based BIS gave its backing to the wave of interest rate rises across developed countries and emerging markets and said plans for even higher borrowing costs over the rest of the year in response to inflationary pressures were essential.

Speaking after its annual general meeting, where top central bankers met to discuss their current difficulties and one of the most turbulent starts to a year ever for global financial markets, BIS general manager Agustín Carstens, said: “The key for central banks is to act quickly and decisively before inflation becomes entrenched.”

Carstens, former head of Mexico’s central bank, said the emphasis was to act in the coming months.

The BIS thinks an economic soft landing – where rates rise without triggering recessions – is still possible, but accepted it was a difficult situation.

“If this tightening generates massive losses, generates massive asset corrections, and that contaminates consumption, investment and employment – of course, that is a more difficult scenario.”

Read more:
British SMEs struggling with ‘a hat-trick of hurt’