Is the Budget likely to enable the UK to engage Top Gear?

Standard

Hammond’s first and last Spring Budget delivered on 8 March doesn’t seem very small business friendly. At first blush, increasing the National Insurance contributions for self-employed to fund care might not seem anything to worry about. But in the same breath corporation tax is being reduced. So, those larger businesses that have a choice about where they base themselves pay less, but small sole traders who have less flexibility are penalised. A tax on “strivers” it would appear.

This follows his predecessor’s naked aggression towards smaller buy to let landlords. The stamp duty rises and reduction in tax breaks are also a tax on “strivers”. If you are a so-called professional landlord with 12 or more properties the rules are different. Hammond could have unwound this divisive and economy depressing position but chose to swerve it.

The UK has been drifting along in neutral for years. Given the looming Brexit negotiations we might have expected a Budget designed to accelerate growth. One that may have had us changing gear and aiming to overtake our competitors. Instead we were presented by a fairly limp, non-event that just seems to unfairly penalise hard working people. May’s government and this Budget seem a throwback to the rather uninspiring days of wet conservatism. Is Hammond Clarke’s son?

At a time where smaller businesses already have significant change to overcome – namely April’s National Living Wage increase and pension Auto-enrolment for smaller firms – last week’s Budget should have been an opportunity for Hammond, May, et al to demonstrate their commitment to boosting the economy by supporting our small businesses.

What the UK needs is help for SMEs; less red tape, more support for exports and chance for the risk takers behind SMEs to hold on to a fair share of what they create.

The Budget doesn’t do this, nor does it seem to even attempt to do this. In order for us to ride the inevitable Brexit bumps and shocks we will need a more robust economy with real growth and a sense of optimism. This must start with support for SMEs who make up the overwhelming majority of businesses in the UK.

Let’s hope that in the Autumn Budget, Hammond takes the chance to be bold and help the SME engine that drives the economy. If the Government fails to direct support in this direction again, it may find its aspirational support looking elsewhere for backing.

Efficient business. Efficient Britain.

Standard

The results of the latest SME Confidence Tracker report show that the final months of 2016 were a time for collective belt tightening and falling investment as rising costs started to take hold for many businesses in the UK.

Prior to the referendum, just one in 10 SMEs cited rising costs as their biggest challenge. In the final months of the year, this had more than doubled. As input costs rise due to a weakened pound, there are renewed fears that stagflation may be around the corner.

Economic think-tank, the National Institute of Social and Economic Research has predicted that inflation will hit 4% this year. I am doubtful that it will reach such heights, but we are undeniably in for a time of price rises. There are significant warning signs already and in December, inflation reached 1.6%, up from 1.2% in November.

This will undoubtedly affect consumer spending, impacting businesses throughout the country. As a consequence of rising input costs, many SMEs now face the conundrum of how to uphold profitability while remaining competitive with their counterparts overseas.

As prices rise, business investment is falling. Our final report for 2016 highlights the scope of this drop. In Q2, the average planned investment amongst SMEs was £101,919. This has more than halved to £49,237 for the first three months of 2017. Planned investment from manufacturing businesses fell by 150%.

Competition was also a key concern for businesses in our research. Behind rising costs, increasing competition was the greatest challenge for UK PLC.

While we await specific direction on the UK’s future relationship with the EU, now is the time for SMEs to look towards efficiency to boost competitiveness and offset cost pressure. But what is business efficiency? There is a common misconception that it means cost cutting and contraction.

What efficiency really means in the context of SMEs, however, is optimising allocated resources in the best way to operate effectively. It involves making assets work harder in order to achieve sustainable business growth. This could include reviewing supply chains, production methods or routes to market. It may also mean considering different sources of funding, overseas trade, how to improve credit control processes or using new transactional technology.

Whatever the case, as the uncertainty of economic events of the past year seep into 2017, now is a good time for businesses to reflect on what they can do better. To consider how they can put themselves in the best possible shape for the year ahead.

While the headlines continue to focus on big business, international trade agreements and the UK’s disentanglement from the EU, it’s UK SMEs that will drive the economy forward. For Theresa May and her Cabinet, amid potentially significant price rises and ‘hard-Brexit’, the mantra for 2017 should be ‘efficient business, efficient Britain’.

Read the SME Confidence Tracker in full here.

Balloons have a habit of bursting

Standard

While all eyes are on Mark Carney following the announcement that he is to stay on as Governor of the Bank of England until 2019, I wrote in August about the Bank’s decision to reduce interest rates from 0.5% to 0.25%.

I felt it was hasty and it is likely to see a quicker rebound than might otherwise have been the case. The Bank clearly got a bit wobbly about Brexit.

Evidence from our own clients points to a collective intake of breath in July and a cautious first six weeks post the vote. In fact, our SME Confidence Tracker showed business confidence at its lowest reading since 2014 in Q3.

Since then it seems that the previous equilibrium has been largely restored and official figures show that the UK economy expanded by 0.5% in the three months following the vote. Though a far cry from the frequent c4% growth of the 1990s, such growth surpassed expectations and led the ONS to suggest “there is little evidence of a pronounced effect in the immediate aftermath”.

So, was this due to heroic good judgement on the part of the Bank of England or did it have as much to do with a record British medal haul at the Olympics? My money is on the latter. The media refrained from shouting “recession” and day-after-day good things happened in Rio. The Union Jack rose and the anthem played.

While we await official figures, early indicators such as the Markit/CIPS Manufacturing PMI, point to a further rebound in confidence throughout October.

Meanwhile, the rate cut sent sterling spiraling down, reaching a new 31-year low against the dollar. Not just the rate cut, of course, the small matter of EU exit uncertainty also played a part, most notably so when Theresa May announced the timing of Article 50’s deployment in October.

Importing inflation

But with falling sterling, why cut rates?  To stave-off a downturn I suppose, but now we can clearly see the consequences. At the end of October, Microsoft announced a 22% price rise. Apple too have weighed in with a chunky uplift. This is likely just the start.

In August, data from HM Revenue & Customs once again highlighted the UK’s net-importer status, with imports exceeding exports by £18bn. Inflation has to rise as we import so much. The National Institute of Economic and Social Research (NIESR) has warned that it could rise to as much as 4% in the second half of 2017.

Exports can be boosted but it takes time to crank the production handle. By such time, it’s likely that input prices will have hardened and so the export drive may evaporate.

It’s at this stage that interest rates will simply have to rise and, due to August’s cut, the rebound is likely to be sharper than would have been otherwise necessary.

When rates do rise, I wonder what might happen to consumer confidence and consequently the orgy of new building currently devouring green fields across the South and Midlands.  What will happen to an already subdued mortgage market and the flotilla of lenders who have inflated an SME credit bubble?

An inflationary balloon is starting to strain and become more translucent by the day. Sometimes balloons deflate quietly in the corner. Sometimes they burst. Time will tell.

Brexit: the impact so far

Standard

16-10-21-brexit-with-houses-of-parliamentAt the Conservative Party conference in Birmingham this month, Theresa May announced that Article 50 of the Lisbon Treaty would be deployed by the end of March 2017, signifying the UK’s intent to leave the EU by summer 2019. Although this was expected sometime before the end of the year, the announcement sent the pound spiralling to a new 31-year low against the dollar as the impacts of the UK’s exit from the EU were once again thrown into the spotlight.

So what have been the impacts so far?

We have a new Government for a start. And while many believed a new cabinet would look to continue the work of its predecessors, Theresa May et al soon dispelled such belief.

New Chancellor, Philip Hammond, set-out the Government’s economic stall by axing Osborne’s deficit target, announcing instead a focus on fiscal stimulus, such as spending on homes and transport. I welcome such fiscal measures, but have concerns over the Government’s commitment to the Northern Powerhouse and Midlands Engine proposals of its precursor. More than ever, it’s critical that we look to rebalance economic growth by investing in important cities such as Birmingham, Manchester, Liverpool and Leeds.

The depreciation of the pound has been a mainstay of the post referendum economy, but while Sterling has declined, the FTSE came close to an all-time high on 4 October, once more highlighting that there are both winners and losers of any market change.

Figures from the Federation of Small Businesses in September revealed that confidence among SMEs reached a 4-year low in the aftermath of the Brexit vote. Correspondingly, our own quarterly SME Confidence Tracker has shown a decline in optimism amongst UK businesses. Indeed, our latest report shows SME confidence at its second lowest reading since 2014, with flat sales growth over the last three months.

Shoots of optimism?

But while the impacts of the vote have undoubtedly created a mood of uncertainty, it hasn’t been the disaster that many predicted.

Chief Economist at the Office for National Statistics, Joe Grice, recently noted that data since 23 June does not reflect a huge shock to the UK economy. Similarly, while acknowledging that it is premature to assume Brexit will have no significant impact, the OECD backpedalled on its initial warning that Brexit would damage the economy, revising its growth forecast for the UK.

Echoing this sentiment, in our latest SME Confidence Tracker, more than a third of SMEs told us that Brexit hasn’t negatively impacted their businesses and the same proportion (37%) said it’s too early to tell. And despite a general picture of stagnation and flat sales growth, there are some green shoots of business optimism as SMEs look to get back to business after an unsettled summer.

Notwithstanding reports of subdued investment since 23 June, our Tracker for Q3 shows that 75% of SMEs invested in their business over the past three months. Investment in new products and services has doubled in the past year and those investing in overseas trade has continued to grow, with three times as many businesses investing in export activity in Q3 than in Q1 2014.

So while Spring 2017 is an economic lifetime away in the current climate, for now it seems that Britain’s small businesses are taking advantage of a period of relative quiet in order to prepare themselves for the year ahead. This includes preparing themselves for a future outside of the UK, irrespective of the macro-economic impacts in 2016.

Brexit means Brexit. But what does Brexit mean for SMEs?

Standard

The Federation of Small Businesses and The British Chambers of Commerce met with Theresa May earlier this month as a way for the new Prime Minster to ask the SME community what they need post-Brexit. The Prime Minister has assured small businesses that cuts to EU funding will be replaced and that the SME sector would be “at the heart” of the renegotiation strategy.

But what exactly does Brexit mean for Britain’s small businesses? Can we build up an economy in these uncertain times, and can SMEs find Brexit opportunities?

We are in no doubt destined for many months of uncertainty as politicians grapple with the referendum’s ramifications. Brexit Secretary, David Davis, has hinted that Article 50 of the Lisbon Treaty (the official mechanism to split from Brussels) will be triggered in early 2017, suggesting the UK will only break away from the EU in 2019 after two years of talks.

The National Institute of Economic and Social Research (NIESR) has predicted that the UK has a 50/50 chance of falling into recession within the next 18 months whilst the Bank of England slashed its 2017 growth forecast from 2.3% to 0.8%.

I have long held the opinion that the UK economy was headed for a slowdown before the referendum outcome was known. Brexit may compound it in the short term, but I don’t believe it is the root cause. Indeed, our SME Confidence Tracker study shows that businesses across Britain were adjusting their expectations in Q2 (before the referendum).

Almost a third of SMEs said that the uncertain economic environment within the UK caused them to hold back on investment, with the proportion of SMEs expecting growth dropping by three percentage points to 45% in Quarter 2 2016.

While there is much talk of downturn, there are opportunities on the horizon for many SMEs if they look beyond our shores.

On 3 August, the CBI reported that Britain’s SMEs are expecting to boost exports over coming quarters as the UK becomes more competitive, thanks to a devaluation in the Pound. Our SME Confidence Tracker shows the proportion of SMEs investing in export activity rising steadily since 2014. This is certainly something we are seeing in our International and Trade businesses as many SMEs begin to consider export activity, particularly those who manufacture or source goods from within the UK.

While UK interest rates were cut from 0.5% to 0.25%, the Bank of England has signalled that they could go lower if the economy worsens. The worry I have is that a weakening Pound (caused in part by falling interest rates) could increase inflation and thereby necessitate the need for rates to rise more rapidly. I think there was a strong case for the MPC to sit on its hands and not cut rates. The Bank of England Governor, Mark Carney, said that the decision to leave the EU marked a “regime change” in which the UK would “redefine its openness to the movements of goods, services, people and capital”. It is this redefinition of openness that SMEs have most to gain from but also most to lose if the opportunities are not seized.

Mark Carney also announced the Term Funding Scheme, which it is hoped will help mitigate a reduction in the BoE’s benchmark interest rate for commercial banks, supporting them in their efforts to pass on lower rates to customers. The aim of the TFS (which has a capacity of £100bn) is to avoid “perverse effects on the supply of lending from the cut in Bank Rate”.

This move somewhat baffles me as I have been saying for a long time that there is too much money chasing too few businesses. It strikes me that this is a move to help bigger businesses rather than smaller players. I have also warned the Bank that the SME lending bubble will burst. Pouring more petrol on the fire may delay the moment things go awry, but my sense is that it could increase the magnitude when things do.

As Britain grapples with the realities of the economic ramifications of the Brexit vote, it will be incumbent on the Government and the BoE to work together to protect the smallest as well as the biggest players in the economy. As the Prime Minister said, SMEs need to be at the heart of the renegotiation but they also need to be at the heart of economic and business policy.

In the first few weeks of her premiership, the Prime Minster has travelled extensively to meet key political and economic figures to gauge their perspectives and concerns on the issue of the UK withdrawal from the EU. That the SME community is being given a direct line to the PM so early into her administration is a credit to her commitment to Britain’s small businesses and hopefully the sign of future things to come – and soon.