December 7, 2022

Mid-sized UK businesses scale back investment as recession looms

Mid-sized UK businesses scale back investment as recession looms – but profitability improves as firms pass rising costs onto customers

  • Just over two-fifths of medium firms plan to invest in next six months
  • That’s the lowest since the start of last year, according to a survey of 700 chiefs
  • But profit margins have improved in the last three months, as businesses found it easier to pass price increases onto customers 

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Britain’s mid-sized companies are scaling back investment plans as soaring inflation and interest rate hikes erode business confidence.

Just over two-fifths of mid-sized firms plan to increase capital expenditure in the next six months, research from audit firm RSM UK suggests, the lowest since records began at the start of 2021. 

However, the survey of 700 bosses found profit margins have improved in the last three months, as businesses found it easier to pass price increases onto customers.

Britain’s medium-sized companies are also dialling down their hiring plans

The Middle Market Business Index (MMBI), which covers companies with annual revenues of £10million to £750million, found 44 per cent of respondents were able to hike prices in the last quarter, up from 40 per cent over the spring.

The difference between input and output prices has also improved significantly and remains above its two-year average, suggesting pressure on profit margins has eased.

Companies face soaring energy bills, but the prices of many other commodities, such as oil, wheat and aluminium, have fallen significantly over the last few months, RSM said.

But the recent deterioration of the UK economy is concerning firms, which are also dialling down their hiring plans.

Just over a third saying they were recruiting more staff, down from half at the start of the year. 

Cuts to corporation tax announced by the Government will do little to spur companies to invest, according to the report, with a further hit coming from Government plans to inflict more austerity on Britain. 

‘As there is very little evidence that lower corporation tax feeds into higher business investment, we are anticipating a 3 per cent drop in business investment next year,’ said Thomas Pugh, economist at RSM UK.

Spending cuts […] could further reduce the incentives for businesses to invest 

‘What’s more, as the focus moves from tax cuts towards spending cuts, government investment is likely to take the brunt of efforts to get the public finances on a more sustainable footing. 

‘That could further reduce the incentives for businesses to invest’, he added.

The UK already has the lowest business investment in the G7 and is still almost 10 per cent below its 2016, pre-Brexit referendum level. 

Productivity has also lagged behind that of most other major economies in recent years. 

Lack of investment will likely make things worse, as this has been a key factor in the UK’s poor productivity growth over the last decade, according to the report.

Businesses have been hit hard by volatile energy prices because their usage is not included in the regulator Ofgem’s price cap, which only covers homes.

After mounting pressure and the introduction of a domestic energy cap, ministers last month announced that business energy prices will be capped until March 2023

Pugh said this left them at risk of a cliff edge in spring and of ‘productive investment being deferred or cancelled and otherwise viable firms going bust, making the economy permanently smaller’.

The survey also found that more firms expected to report lower revenues over the next six months as the cost of living crisis hits demand.

‘Surging energy prices and inflation mean that real disposable income will suffer its biggest ever squeeze with the inevitable result that discretionary consumer spending will continue to fall all as an ever-greater share of households’ finances are diverted towards the cost of living, leading to a recession at the end of this year and an extended period of weak growth,’ Pugh added.

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