And will it ever start again?
John Tuld: “Let me tell you something, Mr Sullivan. Do you care to know why I’m in this chair with you all? I mean, why I earn the big bucks?”
Peter Sullivan: “Yes”
John Tuld: “I’m here for one reason and one reason alone. I’m here to guess what the music might do a week, a month, a year from now. That’s it. Nothing more. And standing here tonight, I’m afraid that I don’t hear a thing. Just…silence.”
There have been various pieces of data and reports released recently that taken individually all contain negative news for the overall UK economy – that it might “grind to a halt” before shrinking in the second half of the year.
But analysed collectively they indicate a bigger and more worrying conclusion – that instead of slowing, the economic music might have already stopped and to all intents and purposes the UK is already in a recession, or its SMEs are already experiencing the effects of being in one.
Firstly, the British Chambers of Commerce (BCC) released their forecasts for the UK economy over the next couple of years. They predict:-
- UK GDP Growth will be 3.5% in 2022; 0.6% in 2023 and 1.2% in 2024
- In 2022, growth for Q2 and Q3 will be 0% with a 0.2% contraction
- Household consumption will grow 4% in 2022; 0.6% in 2023 and 1.2% in 2024
- Business investment will grow by 1.8% in 2022; 0.8% in 2023 (due to the end of the super deduction and corporation tax rise) and rise 1.5% in 2024
- Inflation is expected to peak at 10% in Q4 2022; will reduce to 3.5% in 2023 and will be back at the Bank of England’s target rate of 2% by Q4 2024
- Interest rates are expected to rise to 2% by Q4 2022; rise to 3% in 2023 and remain at that level in 2024
Alex Veitch, director of policy at the BCC said: “The latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth.
“The war in Ukraine came just as the UK was beginning a Covid recovery; placing a further squeeze on business profitability.
“The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.
“With inflation forecast to race ahead of wages, we are concerned about a dip in consumer spending which would further impact businesses and hamper growth. We forecast that if trends continue, inflation will only return to the Bank of England’s target rate at the end of 2024, implying a prolonged period of difficulty for the UK.
“Against this backdrop, the government must put in place stable and supportive policies that help businesses pull the UK out of this economic quagmire. Firms must be given confidence to invest, only then can they drive the growth the economy so desperately needs.”
This follows from a report from the Organisation for Economic Co-operation and Development (OECD) that also thinks that the UK will go from the second fastest growing G7 economy to the slowest next year.
A tight labour market of low unemployment and a high demand for workers coupled with below inflation pay rises will mean that consumers will have less disposable income to spend and the longer inflation remains high and growing, the longer this will be a problem for businesses that are trying to attract this spending.
The latest data from the Office for National Statistics (ONS)also further illustrates the growing threat
The ONS found that there was a 0.3% decline in GDP in April which is the second consecutive monthly reduction after a decline of 0.1% recorded in March.
Just as significantly, there were reductions across the service, production and construction sectors for the first time since January 2021.
The ONS findings showed that the significant reduction in NHS Test and Trace activity was mostly responsible for the fall in the services sector with a decrease of 5.6% recorded in human health and social work.
Production output fell by 0.6% which was further dragged down by a 1% reduction in manufacturing as businesses have had to deal with both the impact of price increases and ongoing supply chain shortages.
Construction also saw a fall of 0.4% in April despite a stronger March when there was significant maintenance and repair activity due to the series of damaging storms that hit the country in February.
The data also showed that average wages in the UK were falling at the fastest rate for more than a decade – 2.2% in the three months up to April – as annual pay growth failed to keep up with the rising cost of living.
Interestingly, despite the number of job vacancies reaching a new record high of 1.3 million, the unemployment rate actually increased last month slightly by 0.1% to 3.8% although this is still historically a very low rate.
What does this mean for companies?
We’ve already seen an increase in the number of company insolvencies this year with April’s total of 2,114 corporate insolvencies in England and Wales being the highest recorded in over two years.
Chris Horner, insolvency director with BusinessRescueExpert, thinks that the only argument about whether there will be a recession or not is actually about when rather than if.
He said: “The government would point to various bright spots in the data – and there are some – such as historically low unemployment and that actual growth is forecast over the next three years, not an overall contraction in any year.
“But this doesn’t mean that a recession – defined as two consecutive quarters of negative growth – isn’t going to happen. The chances of this are probably increasing as the underlying factors – cost of living, inflation, interest rates are all rising simultaneously.
“The housing market is cooling, the construction sector is slowing and consumer confidence is flat at best.
“We’re also hearing this odd but important word “stagflation” being mentioned. This is where weak economic growth is coupled with high inflation and can be enormously damaging for any economy trying to deal with it.
“If the current challenging environment continues – the war in the Ukraine, high food and energy inflation and potential for further supply chain disruptions and price rises if trade relations with the EU continue to deteriorate – then the most realistic scenario is also a pessimistic one for most businesses.”
The music might not have stopped but the tempo is definitely slowing down.
And if it does stop, which is looking increasingly more likely than not, then a lot of businesses can find themselves without a seat when they’ll need support most.
If you’re a tuned-in business owner or director then you can use this time to your advantage by booking a free consultation with one of our expert advisors at a convenient time for you.
They will explore every option you have based on your ambitions for your company – whether it’s to strengthen and protect it through turbulent times or to close down and begin again with a minimum of mess and stress.
The earlier you make the decision to get in touch, the sooner we can help you before all anyone can hear is the sound of silence.