As we turn the page on the first half of 2022, our CEO Josh Levy offers his predictions for the remainder of a year already shaped by the unexpected. Despite ending 2021 with renewed levels of confidence from consumers and businesses, this year has been shaped by a combination of the continuation of labour shortages, supply chain challenge, and rising inflation. With these issues largely stemming from the pandemic and post-Brexit measures and driven even further up by the war in Ukraine, it is impossible to predict exactly when economic conditions will begin to normalise. Here are eight predictions that we believe will impact businesses in the next few months.
Politics to dominate the summer
The fall-out from the Conservative leadership battle will dominate the headlines over the summer and beyond, with the final result of the ballot of Conversative members, and therefore a new leader and Prime Minister, to come on 5th September.
Early statements from most candidates have pledged significant tax cuts and a divergence from the current Government’s fiscal policies. This has prompted Shadow Chancellor Rachel Reeves to describe the leadership race as a “festival of irresponsibility” and certainly there is a danger of politics and ideology coming at the expense of sound economic decisions.
According to the latest campaign trails, a change of political direction could mean more support for businesses to reduce the impact of rising costs and an inflation rate yet to peak.
The leadership battle and transition to a new Government will be critical for the future path of the UK as a caretaker Cabinet hands over to incoming Ministers facing unique economic and geopolitical pressures.
Inflation to peak in October
UK CPI inflation hit a 40-year high of 9.1% in May with pressure on commodity prices following Russia’s invasion of Ukraine and general domestic cost pressures, partly attributed to the tight labour market.
The Bank of England are currently forecasting a peak in inflation of 11% in October with the next energy price gap reset, emphasising the exposure that the UK economy has to soaring energy prices. Beyond this, inflation is set to fall through 2023 and return closer to target levels but with upside risk if the war continues or second round inflation effects start filtering through.
The rise in inflation will add to cost of living pressures on households and further squeezes in operating margins for businesses generally.
Interest rates to keep rising
One of the main policy tools to combat high inflation is increases in interest rates set by central banks. Despite the Bank of England already increasing rates from 0.1% to 1.25% this year with five rate hikes in a row, they have stated that they will “take the actions necessary to return inflation to the 2% target sustainably in the medium term…and will if necessary act forcefully in response”.
We are firmly in a global rate increase cycle with big implications in lots of areas, impacting both households and businesses. Our current forecast is for rates in the UK to reach at least 2.25% by the end of the year, peaking at around 3% in the first half of 2023.
Higher rates will further impact on the cost of living for UK households but the impact will take time to be felt given the high prevalence of fixed rate mortgages (c.80%).
Economic slowdown to squeeze consumer / business spending
Lower economic growth and higher inflation will undermine confidence and drag on consumer spending and business investment decisions. Despite recent news of the economy growing higher than expected in May with a 0.5% increase, growth is slowing and the question is more about the severity and magnitude of the downturn. Embedded expectations of inflation are a prime concern of businesses across the UK and will undermine growth and investment until it starts to unwind.
Usually in a downturn or recession, Governments and central banks can provide support for growth but because of inflation and very high Government debt, this is unlikely to be possible without a significant fiscal shift that may come as a result of the change of Government.
Insolvency levels to keep increasing
The latest insolvency figures show total company insolvencies up 92% in the first half of 2022 compared to the same period in 2021, largely driven by voluntary liquidations, the most common form of insolvency process.
Other forms of insolvency process have remained lower than pre-pandemic levels but are very much on the up. In H1 2022, there were 596 company administrations vs. 360 in H1 2021. However, this is still below the pre-pandemic figure in H1 2019 where there were 885 administrations.
Given the backdrop of rising costs – labour, materials, fuel, energy – and demand pressures, the second half of the year is likely to unfortunately see other businesses run into cashflow problems and fall into some form of insolvency process.
Whereas we have seen plenty of insolvencies kept at bay thanks to Government schemes in the last couple of years, it is yet to be seen what measure – if any – Boris Johnson’s successor will unveil to support businesses throughout the next two quarters.
Property price growth to come to an end
Property price growth is very likely to slow or go into decline as higher mortgage rates and economic stagnation take hold. Capital Economics have described property prices as being “detached from reality” following significant increases in values over the last two years.
The higher cost of borrowing will impact upon affordability and in turn values, but given some of the structural demand drivers and continued supply shortages, we do not expect a crash in property values.
That said, a slowdown is taking place in transaction volumes and value appreciation, with the latest RICS data showing falling indicators – agreed sales, enquiry levels and price growth expectations.
Ukraine war to rumble on – supply chain impact
In addition to tragic and avoidable lost lives and opportunities, the Russian invasion of Ukraine has engendered a ripple effect felt in most nations over the world. With the aftershock of the pandemic and Brexit red tape already responsible for some domestic issues in terms of costs and workforce, the sudden war accelerated cost increases with a direct impact on energy and food costs and availability.
It is hard to predict when and how the conflict may end, but it appears likely to settle into a continued war of attrition and as long as the war rages on, prices and supply chains remain under pressure.
Asset Based Lending solutions to remain highly valued
With all the challenges above certain to continue to create disruption to the business landscape, business owners will need committed funding partners in their corner to continue on their road to recovery. Latest figures from UK Finance show that Q1 2022 saw the first material increase in overdraft applications, approval and utilisation in two years, and many have chosen to turn to specialist finance to help keep their business moving: the first quarter of the year shows that Invoice Finance and asset based lending advances have kept on increasing for the fourth quarter in a row with a further 10 per cent increase over the period. Guaranteed access to liquidity will remain pivotal for businesses to succeed in the face of many factors out of their control, and lenders and Introducers such as brokers, accountants and financial directors will continue to play a vital role in introducing them to the right funding solution(s) for their ambitions.
At Ultimate Finance we have been championing UK SMEs and supporting their ambitions for 20 years, and we have developed a range of tailored and flexible funding solutions that have been proven to help keep businesses moving. During difficult times, our teams have ensured that the funding and support we provide have remained of the utmost quality and true to our values of enterprise, brilliance, and decency. This year, we have committed to further support UK businesses with direct actions, such as increasing upper limits on Working Capital, Asset Finance, Bridging Finance and Structured Finance solutions to provide up to £10m through one facility. Finally, we also renewed our commitment to SMEs by signing the Business Finance Council’s revised SME Finance charter.