Hate to say we told you so...

By | February 14, 2011

money-1900By Chris Gorman, Forum of Private Business

Ever since the global financial meltdown, attempting to diagnose the health of the economy has become a national preoccupation.

Journalists, analysts and politicians clamour over each new batch of statistics on growth, lending and insolvency, desperately trying to interpret what the reams of numbers and percentages actually mean for businesses and consumers on the ground.

Last year, figures from the Office for National Statistics suggested strong economic growth in the second and third quarters. An expanding GDP doesn’t necessarily go hand-in-hand with tangible improvements in trading conditions for your typical small firm, but our Economy Watch research appeared to show that the ONS was onto something.

Economy Watch found that many small businesses had indeed experienced a rise in orders and turnover in the second half of 2010.

Out of the 358 specially-selected companies which make up the qualitative panel, one in three (30%) had seen increases in their order books and turnovers, while only 16% reported a decrease.

Business for the remaining 54% stayed steady, creating a balance of 14% which fits in well with the strong growth reported by the ONS in quarter three.

However, there was a catch. Many business owners on the panel also reported a sharp drop in profitability during the same period as increases in fuel costs, energy prices and raw materials hit home.

At 46%, almost half of the firms surveyed said they had seen a recent increase in the cost of doing business, with only 1% reporting that costs had fallen.

As a result, 27% of Economy Watch panel members reported a decrease in profitability since they were last surveyed in October, compared to just 14% reporting an increase.

So while trading conditions may, on the whole, have improved in late 2010, a lot of small companies appeared to be struggling to maintain profits in the face of a new threat – the spiralling costs of unavoidable things like fuel, gas and electricity.

At the time, we at the Forum warned that this inflationary pressure was in danger of derailing recovery – particularly when coupled with the January VAT rise.

We urged the Government to take drastic action to tackle spiralling energy costs – and fuel costs in particular. With around 70% of pump prices going straight to the Treasury, we argued that although dealing with the utility companies’ controversial prices may take time, Messrs Cameron and Osborne could ease the pain of millions of businesses and motorists virtually overnight.

But despite a number of vague pledges to look into the issue, and perhaps cancel the planned 1p fuel duty increase pencilled in for April, nothing much was done. Now, new GDP figures appear to show that the economy did indeed shrink in the final quarter of last year.

The contraction might only have been a marginal 0.5%, and December’s wintry weather has been blamed for contributing to the slump, but it still represents a noticeable change from the previous quarter’s strong growth.

Some analysts have pointed to public sector bodies tightening their belts ahead of the forthcoming spending cuts, and some say continuing uncertainty in the housing market is making consumers wary.

But I think a much more straightforward explanation is simply that an ever-increasing amount of money is being sucked out of the UK economy and into the hands of a small cartel of beneficiaries – including utility giants, multi-national oil companies and the Treasury.

Of course, businesses and governments alike will always want to see as much money coming into their coffers as possible, and a higher oil price means more revenue for the Treasury due to the VAT charged on each purchase of fuel. And of course, with the public finances in such unimaginable trouble, a lucrative source of revenue like fuel duty must feel like a godsend to the Government.

But it’s a fool’s paradise because it means the wider economy will suffer – leading to an even lower tax-take in the long run.

This is something the Government really needs to confront if it genuinely wants to fix the economy – and get the credit for doing so. We urgently need to see something like the ‘fuel price stabiliser’ put in place.

This was the mechanism to cut the duty on petrol and diesel as oil prices go up, which the Conservatives promised in their pre-election manifesto but quietly shelved after they gained power.

We also hope that Ofgem’s new investigation of the utility giants is a thorough one and does everything possible to make sure energy prices aren’t being kept artificially high.

Interestingly, Economy Watch also revealed businesses expect to secure 20% more finance for development this year than they did in 2010.

Those surveyed anticipated receiving around £45,500 each in 2011, rather than the £38,000 they said they expected during 2010, back when they were surveyed in February.

However, the amount business expect to source from external sources – predominantly traditional bank lending – has seen a 27% slump. Correspondingly, the amount business owners expect to come from internal sources such as directors, friends and family members, shot up from 10% for 2010 to 45% for 2011.

Obviously, it’s encouraging to see that smaller businesses expect to invest more in business development this year than they did in 2010. It shows they are fairly optimistic about their prospects and believe they will be able to develop and grow in the future.

However, the large drop in the amount of finance small companies expect to receive from external sources does serve as a stark reminder of how much faith has been lost in traditional credit streams such as bank lending.

However, we at the Forum believe there are alternatives and ways for SMEs to greatly improve their chances of securing finance. That’s why we’re helping businesses access innovative new schemes like the Funding Store and the Funding Circle, which aim to get creditworthy firms the best possible borrowing deals by sharing their details with a much greater volume and diversity of potential lenders.

We also helped to devise the operating principles for Doing Business Together – a body made up of organisations including banks, credit rating agencies and trade credit insurers to help smaller firms manage their finances better and access the funds they need.

One thought on “Hate to say we told you so...

  1. Damian Ward

    I completely agree, it’s as much about margins as it is sales growth. The Bank of England is constantly emphasising the mass of excess supply capacity within the economy. This forces firms to cut prices in order to optimise their supply capacity. But on the cost side, cost push inflation(rising fuel prices etc) are raising operating expenses. So in terms of margins, revenues and costs are moving towards each other, leading to narrower margins.

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