The current UK economic outlook for SME's | Costs to prices

In this series of articles, we aim to provide a brief overview of the UK economic outlook and the potential implications for small to medium owner-managed businesses.  Utilising Business Insights and Conditions Survey (BICs) data from October 2022 we’ll be looking at a variety of topics across four weekly articles. Our first article kicks off the series with a focus on price increases, with future articles covering:

  • The extent of which UK businesses expect to cease trading
  • The impact of UK supply chain disruptions
  • UK businesses’ future turnover expectations

Headline inflation figures reached 10.1% as of September 2022, presenting a multi-faceted challenge for UK businesses. We therefore explore here the extent to which increased business input costs are impacting product and service pricing decisions.

Within this article we will explore and discuss the following:

  1. An overview of the inflationary outlook
  2. A review UK inflation sentiment
  3. Examining the extent of cost to price changes

An overview of the inflationary outlook

Producer price inflation (PPI) is a measure of inflation from the perspective of industry and business. This provides a measure of price changes prior to being purchased by consumers, allowing us to closely examine inflationary pressures impacting UK businesses. Below we will review changes in input prices used to produce goods (“input PPI”) as well as the output prices of produced goods (“output PPI”). This is important as it allows us to review the extent to which cost changes for businesses impact the output prices of produced goods.

We can see from the chart above that there has been a significant appreciation in both input & output PPI from April 2020 – July 2022 with input PPI showing the sharpest appreciation. The implications of rising input costs for businesses potentially risk restricted profitability, as well as directly influencing product pricing decisions. We can generally see a sizeable proportion of rising input costs are being passed to prices as reflected by simultaneously consistent increases in output PPI (the price of goods). Although, output pricing is not increasing to the same extent which, given the current supply chain issues, is unlikely to be due to businesses offloading increased stock levels but more likely to be business owners being unable (or cautious not to) pass the costs on, as we will analyse further below. However, the decreasing growth rates for Output and Input PPI as well as a tightening divergence between the two hint that cost and pricing pressure may have peaked currently.

The extent of current cost to price increases and a review of UK inflationary sentiment

PPI figures show us that prices have generally risen drastically for producers with some marginal relief as of September 2022. Below we review this in greater detail through examining the current extent of cost to price increases, and inflation sentiment sourced from UK business owners; categorised by business size (employee number) and industry. Through reviewing BIC survey results from UK businesses, we are able to identify the lived experience of business owners and understand market sentiment for how they expect prices to change in to November 2022.

A sizeable proportion of businesses are yet to pass higher costs to consumers through price increases.

This is particularly apparent for smaller businesses as those within the 0-9 and 10-49 employee ranges are passing the lowest relative proportion of cost increases to prices. This finding falls in line with recent reports outlining that smaller UK SMEs are struggling to compete with the lower prices offered by larger businesses, with many avoiding passing on the increases for fear of tainting customer relationships.

Higher employee businesses show the highest (relative) proportion of cost increases being passed to prices whilst reporting greater uncertainty.

Interestingly higher employee businesses within the 50-99 and 100-249 ranges show the highest relative proportion of cost increases being passed to prices. Furthermore, recent figures indicate that larger employee businesses within the 100-249 and 250+ ranges are the most uncertain of the extent increased costs will be passed to prices.

Uncertainty in this circumstance may be due to the fact that for the larger businesses there is an increased likelihood that they will be able to benefit from economies of scale and resource capacity. Therefore, some businesses may not be seeing the same direct increase to costs and have sufficient agility afforded to them through purchasing power and resource-rich operational models to push back cost increases to suppliers, rather than pushing them on to customers. While those larger businesses that are needing to push prices on to customers are doing so effectively, likely due to lower concentration risk across their customer base and greater stock reserves.

Below we review how this translates to the inflationary sentiment of UK business owners for the next 30 days (November 2022).

Recent figures reflect the view that, largely, SMEs expect that prices will remain broadly the same, particularly for larger employers.

This trend is most prevalent within the larger 100-250+ employee ranges, perhaps once again signalling that inflationary pressures are not felt as strongly in this category, to the extent that 55%-57% don’t anticipate increasing prices further (if they have at all).

This is further supported by the 16% of 250+ employee businesses reporting a relatively higher degree of ‘not sure’ responses regarding the future price outlook compared to their smaller peers. As with the Sept-Oct price increase data above, it is reasonable to assume that larger SMEs may not have an as direct correlation between increased costs and price increases to their customers.

However, given the political shifts experienced in the UK during the weeks preceding the latest wave of BICS data, it is interesting that the proportion of businesses that are unsure of how prices may change in the coming month is not higher across all SME sizes.

While it may be good news that sentiment towards increased prices is not overwhelmingly the majority, it does seem that current high prices are here to stay for the foreseeable and that the inflationary outlook is far from over for businesses across the UK. We explore this further below by segregating the data by industry.

Figures suggest that the ‘pause’ in price inflation is expected across all sectors too.

The data shows that inflationary sentiment remains prominent with the highest degree of price stagnation shown within other Service Activities, Arts, Entertainment & Recreation, Education,  and Professional, Scientific & Technical. Interestingly, historical data showed that these industries were also reluctant to pass cost increases to prices.  For businesses that are unwilling or unable to pass cost increases through to prices, if their expectations live out, this may lead to sustained increases in costs and subsequent losses of profitability.

High Cost of Sale industries expect significantly greater price increases relative to price decreases.

The industries displaying the most severe inflationary sentiment include Accommodation & Food, Wholesale & Retail Trade,  Manufacturing, and Construction, which is unsurprising given supply chain disruptions, materials and food shortages experienced in these industries in recent months which is likely to have a significant impact on cost of sale and profitability.

In September – October figures, Manufacturing, Construction and Accommodation & Food have reported the greatest susceptibility to passing increased costs to prices, with 40%+ of businesses surveyed in those industries saying they had passed at least some cost increases on to prices.

If this industry outlook is reflected through price increases in November and sustained, this may weaken demand which could hinder turnover performance due to increased costs for consumers. Unfortunately, the potential implications span further on the supply side as inflation within the supply chain can lead to price increases which can in turn worsen supply chain inflation. At greater risk in this circumstance is the Health & Social work industry. This industry has a different relationship with supply, demand and how prices play into the equation compared to most other industries, as businesses in this industry do not generally have as much control over cost increases or how they operate as a result. It will be interesting to see how the sentiment here plays out during an already difficult time across the sector.

In contrast, a weaker expectation of further price increases can be seen in other Service activities, and Professional, Scientific & Technical. If this expectation lives out in November this may encourage demand or at least provide some relief from current demand pressures resulting from inflation.

Pricing pressure for UK businesses is being driven by rising energy and raw material costs across April – November 2022. This is widely recognised to be the result of supply restrictions for oil and gas resulting from the Russia/Ukraine conflict with little signs of relief in sight.

The Bank of England recently suggested that 6% of the overall inflation rate is due to energy price increases. The data presented above would appear to support that finding. Overall as seen across featured employee ranges, prices for consumers are largely expected to remain at currently inflated levels in upcoming weeks meaning that any price relief for end users is unlikely to be imminent. However, this general trend in sentiment has held over time from the the 1st April – 30th November 2022.

The general trend of prices being expected to remain at inflated levels has held across April – November 2022.

Overall, this displays certainty of inflationary pressures from the perspective of UK businesses, and suggestions of a reluctance to increase prices beyond a certain point, across the last 6 months with a similar outlook reported for November 2022. Overall, inflation expectations are showing little signs of relief as of currently and will remain a pervasive commercial issue heading into 2023.

Key takeaway points

  • Both output and input PPI growth rates have consistently and sharply appreciated from March 2020 – June 2022, treating a worrying inflationary outlook for the UK. Nevertheless, July-September 2022 shows some relief through consistent decreases in the Input PPI growth rate since its June high with the output PPI growth rate falling for September relative to its August peak.
  • Current inflation expectations for larger businesses across industries are geared towards prices remaining at current inflated levels, perhaps due to reduced exposure to cost increases for these businesses. Supported by the finding that that inflation for SMEs is expected to rise.
  • Larger SMEs with 250+ employees are likely to have greater purchasing power afforded to them by access to economies of scale, and benefit from higher stock and resource capacity which may explain why these larger businesses are reporting greater ‘uncertainty’ within their inflation expectations relative to smaller SMEs, as the cost to price relationship is less direct.
  • Many UK businesses across industries are yet to pass increased costs to prices as businesses with fewer employees reported the least willingness to do so.
  • The current pricing pressure for UK businesses resulting from increased costs is driven by rising energy and input prices with little signs of relief being shown as of currently.

In next week’s article we explore those businesses that have ceased trading in recent months, and examine the trends that exist on a size and industry basis to understand those most at risk, and those that are proving resilient through current economic climes.

In this series of articles, we aim to provide an overview of the UK economic outlook and the potential implications for small to medium sized owner-managed businesses.  Utilising Business Insights and Conditions Survey (BICs) data surveying 39,094 business owners for November 2022, we’ll be looking at a variety of topics across 5 articles published weekly.

You can read our first article looking at the impact of rising input costs on our Content Hub. Our second article moves on to provide an overview of the current challenges facing UK businesses and discovers how polarisation may be occurring in certain sections of the UK business economy. Future articles will cover:

UK businesses have been in a prolonged period of uncertainty since early 2020. Economic headwinds, global crises and political unrest are taking their toll on business’ abilities to perform and grow. If we look at monthly insolvency figures alone, as of September 2022 total insolvencies have risen by 16% from September 2021. While some relief can be found in the 21% fall in business insolvencies since their peak in March 2022, the trend is still one of concern for UK business owners and their stakeholders. In this article we seek to investigate the reality of these concerns on business owners’ trading decisions.

In line with the first article in our series, the primary concern for UK business owners is the rising inflation of goods and service prices. This is playing out differently for different businesses depending on their willingness and ability to pass on prices to their customers. This in turn creates volatility in confidence and the ability to sustain and improve competitive position, turnover and ultimately future survival. A total of 25% of UK businesses have identified price inflation as their major concern, with energy prices following closely behind (22%).

Yet, from the latest data we also see that a not-insignificant 17% of business owners are reporting ‘no concerns’ for their business, in spite of the well documented headwinds faced. When we investigate further into where this 17% originates from, the results are quite remarkable.

As seen above, smaller UK SME’s within the 0-9 employee range are reporting the lowest level of concern comparative to larger employee groups, with 18% of sub-10 employee businesses reporting ‘no concerns’ for their business. However, when we look at this alongside the trading status data from the same survey results, it reveals an interesting picture.

What we can see above is that 16% of sub-10 employee businesses in the UK are facing increased operational difficulties and trading at less than 100%, with 2% of businesses ceasing operations entirely. This is only 4% lower than businesses that had either fully or partially ceased trading during the height of the COVID-19 pandemic (20.2% in October 2020).

BICs data is reported on an aggregate basis, therefore, we do not have the privilege of the granular detail that could enable us to identify correlations between the two charts. However, in a circumstance like this where we have 18% with no concerns, and 16% of the same group having to reduce trading, it is likely that we are witnessing significant polarisation between businesses’ responses to the external pressures and the critical mass in employees required to continue operations undisturbed.

For businesses with 50+ employees, on average only 2% of businesses are having to reduce trading, and for those businesses employing between 10-49 people their likelihood of reducing trading is half that of their sub-10 person counterparts. This demonstrates that businesses who are able to operate with 50 employees or more have significantly better chances of responding positively to the environmental challenges faced than those with sub-50. However, what that doesn’t answer is why the smaller SMEs facing greater risks to trading are the population with the least concerns.

The significant proportion of firms in the sub-10 employee category that are reducing their operations to partial trading suggests that those businesses unable to respond positively, such as successfully passing on price increases to customers, are being left with no option other than to reduce insolvency risk through scaling down operations. Whereas, it appears there may be some businesses in this category who streamlined operations during the COVID-19 and Brexit adjustment periods to the extent that they are now in the advantaged position to be operate successfully without further labour requirements.

These differences are not just occurring at an employee level; there is significant divergence in the challenges faced across different sectors.

We can observe some interesting trends when it comes to those industries with a significant proportion of business owners reporting no current concerns. Information & communications (29%), Professional, scientific & technical (25%), Arts, Entertainment & recreation (25%), Administrative & support (23%), Human health & social work activities (23%), and Transportation & storage (20%) are among the industries with highest proportion of business owners that are experiencing minimal concerns.

We notice here that some of the industries with a high proportion of unconcerned business owners share the highest proportion of businesses with reduced trading activity. Transportation & storage is the worst affected; whilst 20% of all business owners in the BICs survey reported no concerns for their business, 17% of the same sample have reported a reduction in trading activity with 3% ceasing trading with no current plans to restart. Next week when we consider supply chain concerns, there will be further light shed on this particular industry. However, once again we are likely seeing the early signs of polarisation between businesses who have been able to adapt their operational strategy without impacting trading, and those that have not.

Similarly, the Information & Communications industry that excelled through the COVID-19 period as demand for business and personal communication solutions increased rapidly, appears to be suffering similar challenges. 6% of businesses in this industry are reducing trading, with 11% (the highest proportion across all industries) of businesses pausing trading entirely for the foreseeable.

The Accommodation & Food service activities industry is also displaying interesting dynamics; in our first article, this industry was among the sectors experiencing a greater reluctance to pass on prices to customers. However, a quarter of the businesses surveyed in this industry have reported to have either partially or fully ceased trading in the same period. Once again, without access to the spread of data within each the industry, it is difficult to draw hard and fast conclusions. However, the move to partial trading in this industry could be an indication of where some have failed to successfully pass on prices to their customers.

The data shows a polarised outlook both for UK businesses with less than 50 employees, and at an industry specific level for Transport & Storage, Information & Communication and hospitality sectors.

In our next article, we dig deeper into some of the primary business concerns mentioned here, starting first with supply chain disruptions to understand the impact of disruption on rising costs, turnover volatility and operational strategies.

Key findings

  • Total monthly insolvency figures have risen by 16% in the last 12 months to September 2022. Although they peaked in March 2022, reducing by 21% in the 6 months since.
  • Inflation of goods and services prices, and energy prices are the two major concerns for UK SME owners with 47% of all UK SMEs naming these as a concern for their business for November 2022.
  • 17% of all SME business owners, however, also reported ‘no concerns’ for their business, in spite of well documented headwinds. Of those with no concerns for their business, sub-10 employee businesses and those in Professional, scientific & technical, Arts, Entertainment & recreation, Administrative & support, Human health & social work activities, and Transportation & storage industries featured highest.
  • However, a growing proportion of businesses in the sub-10 employee category and from Transportation & Storage industries are reporting partial or full ceases in trading in the same period. Suggesting a polarised outlook for some sub-sections of UK businesses, depending on how they respond to challenges faced across the economy.
  • This data, alongside data from our first cost to prices article, suggests that those businesses who have successfully passed on cost increases to customer prices are faring better than those who are either unwilling or have been unsuccessful in doing so.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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