As our new Prime Minister, Rishi Sunak warned in his first statement – we are facing profound economic challenges. David Tilling, CEO of eCapital UK provides his view on the market as our thoughts turn to closing off 2022 and why he is trying to remain optimistic as we look forward to a new year.
2022 is fast drawing to a close and who could have imagined as we embarked on a new year, what turmoil would lie ahead. From political upheavals, a war in Europe, an energy crisis, rising interest rates, inflation at an all-time high and a resultant cost-of-living crisis. It seems extraordinary that having survived a pandemic and adapted to volatility and uncertainty as a way of life, we are now faced with a landscape that continues to test even the strongest of businesses as we strive to grow and stay competitive.
We are not alone – it’s a picture that spans the globe and although that does not reassure us at least it provides some comfort that we are not alone!
In the UK, we must surely be hopeful that Rishi Sunak will be able to settle things down and focus on bringing stability to proceedings so that the Government can turn its efforts to working on the UK’s issues rather than what seems like a never-ending firefighting response to allegation after allegation.
The Chancellor has his work cut out and the Autumn Fiscal Statement aimed to set out how he intends to repair the country’s finances. His number one priority was to achieve economic stability and restore confidence that the UK can pay its way. It was positioned as a tax rising, expenditure cutting budget but in practice he has achieved his objective by freezing tax thresholds for the next five years and keeping to existing spending limits, enabling inflation to bite into living standards over the years ahead.
If we look at the UK economy, it’s contracting overall but there are regions which are still seeing growth – not surprisingly London and the Southeast. Sectorally, the CBI has just revealed that the private sector growth gauge for the three months to the end of October is still in contraction but is less of a contraction on the previous three months with services and distribution expecting a further downturn but with Manufacturing more positive. That said, it appears that a recession is inevitable, and we may be in it sooner than we think – perhaps before we close out this year.
I believe it’s going to be tough for a few years. Inflation will continue to rise but will most likely peak nearer 13% in the first half of 2023 with interest rate rises continuing to be used as a vehicle to curb inflation. Both the US and European Central banks are continuing to raise their interest rates to curb inflationary pressures even at a risk to economic growth. Russia’s war with Ukraine will continue and we watch with bated breath if China decides to follow suit with Taiwan.
Supply Chains have been under intense pressure in 2022 and although they are easing, they are still at threat from China’s incessant policy of locking down when Coronavirus raises its head. As we write, there are more draconian lockdowns being put in place which will affect production. One figure I have seen is that Apple are expecting production levels to drop by 30% as a result of the latest Chinese lockdown!
Focus on positive things
But I’m an eternal optimist and I believe UK Businesses will continue to focus on investing in business growth. They are a resilient bunch and will be doing their best to keep their businesses growing. It’s very easy to just focus on the doom and gloom in the media but they are like a stuck record.
What about focussing on the less headline driven statistics which show that our borrowing was driven up by two extreme events – the financial crash in 2008 and the pandemic in 2020. Outside of those years, we continued to reduce our borrowing levels to an acceptable percentage of GDP with 22-23 OBR forecasts at 3.9% (down from 14.8% during Covid). We were making headway. We just need to keep income from taxes coming in to start reducing the debt – let’s see what Mr Hunt has in his bag of tricks. We need to encourage business optimism with a good old injection of confidence.
An Autumn statement to build confidence
Business in general will be relieved that few unexpected tax increases were announced. Corporation tax, as previously announced, will rise to 25% from 1 April 2023, with the banking surcharge rate being reduced to 3%.
As announced previously, the annual investment allowance for capital expenditure is remaining at £1 million permanently, enabling businesses to get immediate tax relief for the first £1 million of expenditure on qualifying capital assets. There was no update on the capital allowance super-deduction and so we can expect this to end as planned on 31 March 2023.
My advice is for Governments and businesses alike to focus on areas that address our challenges moving forward:
- Investing in educating and training our internal workforce. We have lost a lot of skilled and non-skilled workers in recent years which is holding back capacity and ultimately economic growth.
- Embracing the full benefits of the digital age to speed up production and processes whilst reducing overall costs.
- Boosting business investment – we need to invest in our businesses to grow. We need to be careful of where to invest ensuring that we understand what will produce a better return for our investment.
- Reshoring critical parts of the supply chain – ensuring our supply chains are robust, controllable and can stand up to some of the challenges we have faced and continue to face.
- Accelerating net zero progress for a sustainable future – it may mean an investment but should bring cost benefits also.
- Accelerating progress on trade agreements – The Government needs to drive these agreements, but businesses must be ready to capitalise on them when they come into place.
How will the finance market respond?
So, what of the finance market and UK businesses.
We need to be realistic; times are going to get tough, and businesses will face an uphill battle over the next 12 months as they fight to keep their businesses on track.
When conditions get tough, we normally see Banks tighten their lending policies. We are already experiencing signs of Banks revisiting their books and managing away those who will not fit their criteria in the coming months. More importantly, how will the Banks respond to businesses who default on repayments of their CBILs. They will quite rightly be concerned about reputational risk if they are seen to be too stringent. It will be one to watch but we perhaps know the outcome already.
And what role will HMRC play? We have seen some high-profile examples of how they are resetting themselves. There are many businesses on ‘time to pay’ schemes who with rising costs may be struggling to meet their repayment schedule. How will HMRC respond to defaults when they are under pressure to increase tax receipts?
Many businesses may end up searching for new funding partners and will be turning to their advisors for support but may find their demands are more welcomed by the non-bank funders who adopt a more hands on approach. The Invoice Finance industry has always purported to relish ‘boom or bust’ economies whilst being challenged in a benign economy. It’s the fact that invoice finance enables a firm to access their own money as and when they need it and that funding decisions are based on how their business is trading at that point in time that makes it an appropriate funding solution in good times and in bad.