Economic roundup - where do we go from here?

The British economy is contracting again. Inflation is rising. Unemployment is up. On the surface, things look pretty bleak.

But behind the piles of depressing statistics, there are important realities for business owners. You need to know where the economy is heading if you are to make sensible decisions. So what are we likely to see in the months ahead?

Inflation

Inflation remains a major concern for the British economy. Recent figures suggested that consumer inflation is rising at a faster rate than had previously been expected, and many analysts now believe that the economic recovery could be undermined by this problem.

High levels of inflation are being caused by a number of different factors. Rising commodity prices are amongst the most important; the price of many core foodstuffs, as well as oil, has risen sharply in recent months, and this upward trend looks set to continue. The problem has been exacerbated by the recent VAT increase – particularly as many retailers have used the hike as an opportunity to raise their prices over and above the new VAT rate.

Rising inflation will have a range of implications for business owners. To begin with, consumers will feel poorer. Rising prices will inevitably have an impact on consumer spending, and many firms will be forced to compete on price more effectively.

In addition, though, the Bank of England has come under increased pressure to raise interest rates from their current record low. The Financial Times reported this weekend that investors have made huge bets that the Bank will raise rates as early as May. A rate hike would make borrowing more expensive for both businesses and consumers – meaning that business owners will be hit by the twin pressures of further reduced consumer spending, and higher costs.

As a business owner you should think very carefully about how you will budget for an increase in the cost of your borrowing. You should make sure that potential increases are factored into your cashflow forecasts.

Unemployment

A survey published this week by the Chartered Institute of Personnel and Development (CIPD) suggests that this will be the “quarter of reckoning” for the labour market. The survey found that more organisations are now planning to shrink their workforce than are planning to expand it during the quarter. It also found that the net balance had fallen sharply when compared with the previous quarter.

Much of the fall is attributable to public sector organisations. Government cuts are now beginning to bite, and large-scale lay-offs will be the inevitable result. Although the government has said it expects the private sector to be able to pick up the slack, it seems highly unlikely that businesses will be able (or willing) to take on all those who lose their public sector jobs.

Rising unemployment has a few major implications for business owners. To begin with, more people out of work means more people without a disposable income. It also means more people who will be trying to spend as little as possible even on essentials. So, as unemployment rises, consumer spending will fall – particularly when rising inflation is also taken into account.

At the same time, though, businesses will find it easier and cheaper to hire staff. As there are proportionally fewer jobs available, people will be willing to work for less. Sounds positive, no? Not necessarily.

Yes, increase demand for jobs means that you may be able to fill positions more easily. But it is also likely to mean that there will be a general downward pressure on wages – despite the fact that inflation is pushing up the cost of living. This will mean that people have less cash – and, again, consumer spending may well drop as a result.

Bank lending

Bank lending has also been in the news this week, following the government’s Project Merlin announcement.

Project Merlin was intended, amongst other things, to increase the amount of bank credit available to businesses. While the headline figure of £76 billion of new lending to small firms might sound good, the small print tells another story.

Banks will continue to make lending decisions based on the same commercial criteria – and this means that businesses will continue to find it difficult to persuade lenders that they are credit-worthy. For this reason, Project Merlin may well have little or no tangible impact for most firms – precisely at the time when many businesses need the banks’ help. Click here for more information on Project Merlin.

The economic outlook appears pretty bleak. But it is important to remember that viable, agile firms will continue to survive, and flourish, in this difficult environment. With some creative thinking and good forward planning, you can navigate you way through the choppy financial waters.