Clouds gathering over the global economy have implications for all businesses. From small wholesalers to the largest corporates, no business is fully immune to the effects of a global downturn.
I’ve cautioned for some time that another economic slump could be on the horizon and there are a number of significant challenges for nations across the world to contend with.
Recent ripples emanating from China have pushed this train of thought to the fore as the Asian giant’s stock market slide on “Black Monday” caused markets all over the world to wobble.
China looks vulnerable for the first time in years. Could growth be over stated? Might the stock market and currency be overvalued? Only time will tell.
Earlier this month, The Independent reported that Samsung is to cut 10 per cent of its staff at its South Korean headquarters and the outlook of SMEs in Singapore has hit a three-year low with weaker sales predicted across all sectors according to the Singapore Business Federation.
Closer to home, the Greek crisis is far from abating as the country plans snap elections later this month, which could have profound consequences on the European economy if the third bailout deal is reversed.
Add to such concerns uncertainty over the UK’s place in the EU – and questions over the timing of interest rate rises – it’s plain to see that a lot could go wrong over the months ahead, any of which could have adverse effects for SMEs.
I was intrigued as to why the noises from the Bank of England discount the impact of volatility in the Far East and focus on the threat of inflation above 2% domestically. I do wonder if this is simply talk to prevent excess rather than a real desire to raise rates. Who knows?
I believe that there is underlying inflation masked by weak oil prices. However, when unmasked, demand may drop due to overseas forces. This could dampen down inflation by another means. For my money a rate rise would need to be small and cautious if it comes at all this year.
Preparing for the worst
Homing in on the market for SME funding, there appears to mixed signals about how they are faring amid this macroeconomic fog.
The Bank of England reported in June that loans to non-financial businesses decreased by £5.5 billion on an annualised basis. This marks the biggest drop since the bank started collecting data in 2011. Probing the data further, it reveals that lending to all SMEs actually remained flat, while the contraction took place among larger companies.
Yet flat lending figures appear to have done little to dampen the confidence of SMEs in the UK. The Federation of Small Business (FSB) recently recorded the highest ever number of firms planning to invest in their businesses. The FSB Small Business Index found that “nearly one third of businesses (32%) plan to increase capital investment over the next 12 months.”
Ultimately this means there is a mismatch between SME perceptions and reality as, based on the BoE figures, we are not really seeing the kind of increase in business lending that could likely sustain the significant spending and investment they anticipate.
The squally economic and regulatory weather means that SMEs will be well advised to be careful who they borrow money from. Larger funders have a habit of doing the hokey cokey when it comes to the SME lending market. They’re in when it’s all good and out when the sun stops shining.
Credit appetites are being stretched and margins compressed, and this is a sure sign that when growth slows the economic impact will be painful. The longer things take to turn, the more painful things will be. Working with relationship-based funding partners with track records of growth during recessions is where SMEs will fare best.
Only time will tell how this melting pot of global challenges will impact SMEs. It’s for this reason that businesses should hope for the best and prepare for the worst and this involves making sure their cashflow is in order, sooner rather than later.