One of the region’s leading financial experts today said the mini-budget gave much-needed clarity over the Government’s future economic policy – but said the Chancellor must make driving down inflation and lowering interest rates a top priority.
Mitch Gough, director at Q Financial Services, said moves to cut taxes and Stamp Duty, reverse the planned increase in National Insurance and scrap planned increases on Corporation Tax, would all help address the cost-of-living crisis and build on measures announced earlier this week to control both residential and commercial energy bills.
But Mitch added that allowing inflation and interest rates to soar still further – and failing to support the supply of new housing developments to meet demand fuelled by the Stamp Duty cuts – would hinder future progress.
“It is good to see the Government place such a clear priority on growing the economy and introducing a detailed set of proposals so soon after the new Prime Minister took office,” Mitch said.
“After a period in which there seemed to be considerable drift, it is welcome that we now have a clear indication of the path the Government plans to take to help business and the commercial sector through this difficult period.
“There is no doubt that the cut in Stamp Duty will fuel new demand in the property market, but this must be met with a sustained increase in supply if housing is to remain affordable.
“Yesterday’s 0.5 per cent rise in interest rates to 2.25 per cent and the prospect of future increases and high inflation could mean that much of the extra cash the Government is handing back in this package is quickly eroded.
“We want to see serious moves to tackle inflation and help reverse the trend for ever-rising interest rates, but fully support the drive for growth.
“As ever, the devil will lie in the detail and we will be studying the Chancellor’s statement in great detail over the coming days to ensure we offer the most comprehensive advice possible to both our private and commercial clients.”
Q Financial Services group, which has offices in Wellington and Shrewsbury, is one of the leading and fastest-growing companies in the sector across the Midlands.
The founding partner of one of the region’s most successful commercial property firms says last week’s mini-budget finally gives business some certainty after months of drift.
Tom Bromwich, of Coventry agency Bromwich Hardy, said the Government’s commitment to growing the economy finally offered the business community some much-needed clarity about economic policy.
But he warned that the next 18 months would still be a challenging period as businesses negotiated greatly-increased energy costs, rising inflation, the cost of living crisis and recruitment issues.
“After a period in which there seemed to be considerable drift, it is welcome that we now have a clear indication of the path the Government plans to take to help business and the commercial sector through this difficult period.
“The commercial property market remains strong despite this backdrop, and more clarity on business rates and the Exchequer’s approach to commercial tax will help provide more of the certainty that business needs.
“The reversal of plans to increase National Insurance, scrapping planned increases on Corporation Tax, the creation of new Low Tax Zones across the UK and the cuts in Stamp Duty, all have their merits.
“But we want to see serious moves to tackle inflation and help reverse the trend for ever-rising interest rates, as well as power being given to planning authorities and their partners to bring forward the new developments needed to meet demand.
“We at least have a starting point with the measures announced today and the plan to halve energy bills for the coming six months which gives us a foundation from which we can move forward.
“But as ever with these statements, the devil will very much lie in the detail, which we will study in depth over the coming days so that we can offer the highest quality advice to our clients.”
Bromwich Hardy is one of the country’s largest independent commercial property agencies, regularly featuring in independent lists of the most active firms in the industry.
When the confidence among the small businesses was already showing signs of dwindling amid record-high inflation and supply chain bottlenecks, the latest report of the Blackpool-based Federation of Small Business (FSB) will shake it further. The survey report revealed that in the first quarter of 2022, small businesses struggled to access finance.
The survey results FSB, the UK’s largest campaigning group for small businesses, has highlighted that companies and banks in Britain remained concerned about the worsening economic outlook, which resulted in lending to small businesses falling to its lowest since at least 2014. Just 9 per cent of small businesses applied for finance in the first three months of this year, and the number of approvals for finances reached a record low of 43 per cent.
The most striking thing was that a majority of smaller businesses sought finance to help with their cash flow requirements. Not only this, one in ten small businesses are mulling closing, downsizing, or even disposing of their businesses over the coming year.
Deteriorating small business scenario
Small businesses have been hit hard in the country, first by the Brexit and followed by the unprecedented event of the Covid-19 pandemic. The number of small businesses in Britain witnessed a drastic fall of 6.5 per cent to around 5.5 million at the start of 2021 compared to the last year. Small businesses, especially the small and medium-sized enterprises (SMEs), that account for 99.9 per cent of them and are the major employment generator, with three-fifths of the total UK private sector employment.
SMEs have faced a challenging situation in 2021, which is still continuing, with many reporting no-cash and a low level of confidence in survival, as they not only had to deal with the challenges associated with the COVID-19 pandemic but also with the implications of Brexit during 2021. Small businesses continued experiencing significant challenges limiting their capabilities to engage in innovation and finish projects on time.
Lending for small businesses is getting tough
Going by the FSB survey results, the majority of the 1,211 small business owners and sole traders surveyed in March and April sought traditional overdraft or loan products, and 25 per cent went for asset-based finance, about 7 per cent sought funds through P2P lending platforms, while 5 per cent via crowdfunding. Small businesses are already struggling to repay the support taken from the government during the pandemic, and if the further funding dries up, the possibilities are that they will default and ultimately get closed.
Even the latest report from the Bank of England (BoE) has shown the annual growth rate of lending to SMEs reached a record low. There have been business disruptions that have been stressing the revenue generation of small businesses; while many in the survey reported late payment of invoices; these could be the reasons they are delaying repayments.
Final thoughts
The central bank has not only raised concern over the declining lending to the small businesses but has England warned of a sharp economic slowdown and a recession, with inflation surging to over 10 per cent record levels by the end of this year. At this juncture, if the lenders start shying away from the small businesses, it could turn detrimental to the already faltering economic recovery. Small businesses contribute a major chunk to economic growth and are a major source of employment generation. Now is the time for the lenders to come out of their outdated lending processes and rigid criteria to support small businesses and the nation’s overall economy.
Homeowners are being urged not to panic after the Bank of England raised interest rates to their highest levels in 13 years last week.
Leading Midlands financial services company Q Financial Services says that whilst today’s increase to one per cent is another blow to homeowners hit by the cost of living crisis, there are steps they can take to minimise its impact.
Q director of operations Stuart Mackintosh said there were still attractive mortgage deals on the market and that fixed-term packages now made more sense than ever.
He was speaking after today’s 0.25 per cent increase in the base rate as the Bank of England attempts to hold back soaring inflation and sharp increases in the cost of living.
“This is the fourth increase in the base rate in recent months and coming against the backdrop of the cost of living crisis, homeowners are bound to be feeling more anxious about their mortgages than has been the case for some time.
“But it is important to remember that even after today’s increase, interest rates remain at historically low levels and the indications are the Bank of England will want to keep them that way.
“However, if your mortgage is due for renewal – or you can switch provider without penalties – now is a really good time to start considering your options. This is definitely not the time to just accept the first offer your existing provider makes, but to start shopping around.
“We know from our own experience that homeowners can make substantial savings by getting some expert advice and switching to mortgages better suited to their needs. And by switching to a fixed rate deal, you can guarantee your payments over the course of the term which in turn helps with the rest of the household budgeting.
“There are some really good deals still to be had – often from lesser-known but highly respectable lenders – but you are only likely to find them by seeking help from people who know what to look for.”
Q, which has offices in Wellington and Shrewsbury, offers a full range of financial services and has enjoyed consistent growth over the last five years.
UK’s economic growth posted a sharp drop in the month of February; as per the Office for National Statistics (ONS), data, the economy expanded by 0.1 per cent compared with 0.8 per cent in January. While the Services, with a growth of 0.2 per cent became the prime contributor to the growth, production witnessed a decline of 0.6 per cent and construction, a fall of 0.1 per cent was the major drag on the Gross domestic product (GDP).
Construction and economic growth
Construction growth declined by 0.1 per cent from an increase of 1.6 per cent in January 2022. The decline in monthly construction output was led by a sharp fall of 0.5 per cent in repair and maintenance activities, while the new work also could not keep up with the pace and increased by a modest 0.1 per cent.
Construction activities during the month were also impacted by storms witnessed by the country from 16 to 21 February. Out of the nine sectors, six saw a decline, with infrastructure new work emerging as the major drag, falling for the sixth month in the last seven.
However, the positive thing is that construction output in February is now 1.1 per cent above its pre-coronavirus level. And for the three months period to February 2022, construction output has risen by 2.4 per cent, when compared with the prior three months of September to November 2021. On a quarterly basis, new work and repair and maintenance were the main contributors, while seven of the nine sectors saw an increase at the sector level. Private new housing and non-housing repair and maintenance let to the output growth for the three months to February.
What has been ailing the construction sector?
While many of the firms have termed storms Dudley, Eunice, and Franklin as the reason for the construction output decline during the month of February, as the projects were delayed due to loss of working days, there are reasons beyond that; smaller firms are still facing difficulty in sourcing construction products.
The UK has witnessed a huge rise in material costs in the last two years, which has now aggravated due to the record-high inflation and supply chain disruption due to the Russia-Ukraine war. As per the Materials Cost Index of Building Cost Information Service (BCIS), raw material cost for construction has almost trebled in 2022.
The covid-19 induced supply chain disruptions, which led to unprecedented shortages of raw materials, resulted in a sharp rise in prices, and complicated the Brexit situation. Labor shortages also evolved and pushed the already high cost of construction.
There has been a sudden increase in demand for commodities such as iron, copper, cement etc., amid soaring energy prices that have pushed up construction input prices, while the major construction firms are finding it difficult to pass through costs to consumers amid the rising inflation and cost of living crisis. The recent reports from International Construction costs, have put London on the top spot as the costliest city to build in.
The road ahead for the sector
There has been a decline in construction output during February; however, demand continues to be strong for the sector. Data from the ONS has shown that new orders in the construction industry grew by 9.2 per cent in the final quarter of 2021 (October to December) compared with the third quarter of 2021 (July to September). There has been a continued rise in total orders, with commercial projects keeping the momentum up for the sector. Though there is some decline in confidence about the growth outlook and caution creeping into spending decisions, the near-term outlook remains strong for the construction sector with robust demand in place and all sub-sectors recovering to above their pre-coronavirus level.
As the pandemic impacts are slowly fading, the economy is gradually moving to normalcy with growing confidence among the businesses. The latest Lloyds Bank Business Barometer has shown improvements in both trading prospects and economic optimism, which has led the Business confidence in the country to bounce back to its highest level in five months. Lloyds Bank Business Barometer moved up by five points to 44%, with 10 out of 12 regions in the country reporting growth in the confidence.
The confidence surge was across the sectors with manufacturing and construction reaching their highest level since the start of the pandemic to 54% and 51% respectively, while the Retail confidence increased to 47% and Services confidence remained unchanged at 38%.
Business confidence, which measures a range of financial and economic aspects, is a key economic indicator giving an overview of how the businesses view the trade in the coming future based on production, orders, and finished goods in the sector. Businesses across the globe have been upbeat for the last some time with the hopes of recovery in the economy and continuously lower cases of covid.
The positive aspect of the business confidence growth is that it is has been on an upward trajectory with businesses remaining confident about their sales and hiring amid hopes of strong growth in the year ahead. However, there has been some uncertainty as well regarding overall economic conditions and prospects through the first half of the year, and now the geopolitical worries related to the Russia-Ukraine war are adding to it. The sales growth has been mainly on the domestic level, and the export growth is yet to reach the pre-pandemic levels yet, which may weigh on the confidence if the war escalates.
An interest rate hike could play the spoilsport
The optimism among the businesses is high, but at the same time, there is concern prevailing about the interest rate hike. Over one-third of firms (38%) surveyed by Llyods have raised their concern about interest rates rising to 1%. Inflation is at its record high and is likely to keep moving up with rising energy prices contributing the most in the coming month. Bank of England (BoE) has already raised interest rates twice, and there are expectations of a few more in near future.
It’s a common perception that higher interest rates would limit consumer spending as it increases the cost of borrowing and reduces disposable income; however, it also negatively impacts the business confidence with businesses taking less risk for investment and expansion. Another factor is that higher interest rates usually lead to the strengthening of the currency, which not only makes imports cheaper but makes the export less competitive.
Confidence is rising but government support required
Business confidence is returning to the levels we had seen before the pandemic; however, staffing and inflation would be a major concern going forward. Businesses have been facing challenges of staff turnover since the pandemic. Manufacturers are struggling to get the required skill and simultaneously facing the pressure of retention, raising the input price inflation.
The business confidence index is primarily used to check growth and anticipate curves in economic activity; however, the war situation may alter the trajectory if the businesses become overtly cautious responding to slow spending of consumers or intent to save more depending on the duration of the war. Upbeat business confidence leads firms to spend more on investment and look for expansion and hire more people, with hopes of a sizeable future return. At a time when the economic growth has not been what was being expected, the geopolitical worries may dampen the sentiment. Businesses would expect a government grant rather than any form of a loan if the situation deteriorates from here, as loans would only reduce their future borrowing power and eventually the confidence.
In the last quarter(Q4) of 2021 (October to December), business investment in the UK has gone up by 0.9%, according to the latest figures released by the Office for National Statistics (ONS). However, this was 0.8% lower than the business investment in Q4 2020. Both business investment and gross fixed capital formation (GFCF) across the UK economy have gone up in Q4 2021, but the levels of growth have been different, with GFCF growing by 2.2% as compared to the 0.9% growth in business investment. GFCF was 2.3% more than what it was in Q4 2020. During the pandemic phase, this divergence between the investment patterns of businesses and the government has been widely observed.
Transport equipment the biggest contributor to growth
There was a 0.7% decline in the UK’s business investment from 2020 to 2021. However, positive contributions towards the growth in business investment were made by transport equipment and dwellings. Even though GFCF was 4.7% less than the pre-pandemic 2019 levels, it went up by 5.3% from 2020 to 2021 due to these positive contributions.
The business investment received a positive contribution from transport equipment, which has demonstrated the biggest periodic growth since Q3 2020, standing at 60.2% in Q4 2021. This growth has been witnessed after 2021’s annual reduction of 20.4% for transport equipment. The low investment in transport equipment has been a major concern lately due to the ongoing semiconductor shortage being observed across the globe. Some transport equipment like aircraft and ships have very high value, which leads to high volatility in the transport investment.
The second major contributor to the growth in business investment was dwellings, which grew by 5.7% in Q4 2021. The 2.2% growth in GFCF was mainly due to the positive contributions made by dwellings, transport, government, and intellectual property products (IPP). From 2020 to 2021, there was an 11.9% increase in government investment, which marks the highest such increase since 2008. Also, as compared to the 2019 pre-pandemic levels, there has been a 14.8% increase in government investment.
All the other assets reported negative contributions to business investment growth in Q4 2021. Transfer costs went down by 5.6% in Q4 2021, negatively impacting the business investment growth. After the stamp duty holiday ended in Q3 2021, transfer costs fell in Q4, pulling the GFCF down. The most significant downward contribution to the GFCF was in fact made by other buildings and structures, which fell by 0.7% in Q4 2021. However, these negative contributions were countered by the positive contributions made by transport equipment and dwellings, as mentioned above.
Survey displays diminishing uncertainty
The survey not only gives quantitative but qualitative data. As per the survey comments in Q4 2021, the level of uncertainty has been declining as compared to the Q2 2019 and 2018 levels, as uncertainty was mentioned in only 20% of the comments. Transportation, manufacturing, and storage industries had the highest levels of uncertainty on an industrial basis in Q4 2021. Different sectors of the economy have shown different levels of resilience in tackling the pandemic, and it is evident that there is industrial disparity as well as the disparity between business investment and GFCF in the UK economy.
While the country is going through its worst energy crisis, the government is putting forth all efforts to make the supply chains across the low-carbon electricity generation sector more competitive. A consultation paper has been launched by the government, seeking the industry’s view to make the supply chain of the low-carbon electricity generation sector more competitive, efficient and productive.
How is the industry being supported at present?
The Contracts for Difference (CfD) scheme is presently the primary tool of the government to support low-carbon electricity generation and the overall energy sector. Under this scheme, renewable power generators that fulfill the government-required eligibility criteria can apply for CfDs in the form of a sealed bid and compete for CfDs.
The CfD mechanism works in a fashion that investment for developers of projects with high upfront costs is incentivised so that they can be safeguarded from volatile wholesale prices; in turn, they protect customers from paying high costs when electricity prices surge.
Need to make supply chains across the sector more competitive
The prevailing energy crisis has made the government ponder upon not only the energy security but maintaining its affordability as well. The energy system is in itself a supply chain containing multiple and connected sub-chains. If we talk about the low-carbon electricity generation sector, a focus on the supply chain is required as the sector has been witnessing a very slow and uneven transition to renewables.
Scores of energy companies going bust in the last year have highlighted the fact that risks increase manyfold when the supply chain is reliant on a limited number of companies or technologies. The new consultation includes the provision of rigorous questioning and will ensure that power generators are committed to a scale of actions to increase the supply chain competitiveness.
The supply chain process consultation is also going to incorporating some evolving renewable energy technologies. All those technologies are supposed to be included in the supply chain plans, which are likely to see considerable growth and will have mass deployment in the next CfD round.
How are the supply chain plans going to be deployed?
The supply chain plan that the applicant wishes to commit will go for quality and ambition testing before they are finally passed. However, the Business and Energy Secretary will have the final say and can cancel the contract if the energy generators fail to fulfil the Supply Chain Plan commitments made by them.
The government’s consultation would also look for barring sites from forthcoming applications for all those who do not sign the contract offered or for not meeting the delivery goal.
Way forward
The energy minister has stated that CfDs have helped the country excel in renewable energy while reducing the cost and exposure to fossil fuel prices that have been very volatile. The supply chain process has been gradually being strengthened, and the fourth allocation round of CfDs to be announced later in spring/early summer will highlight its intensity and ensure an enhanced scenario for the fifth round in 2023.
The benefits of the CfD mechanism have been demonstrated since its first allocation, and the latest introduction of Supply chain commitment plans are going to be the government’s main tool to ensure CfDs can grow the low-carbon economy.
Rising inflationary pressure has become a worldwide phenomenon lately, and the UK economy has been suffering from the evils of inflation too. A 2% inflation target was set by the Bank of England (BoE) with an aim to maintain stability in the economy. However, this 2% target has been breached recently, with the Consumer Prices Index (CPI) going up by 5.1% in the 12 months to November 2021. After the inflation level of 5.2% recorded in September 2011, the highest recorded CPI 12-month figure, the BoE is estimating the inflation levels to reach approximately 6% by the spring of 2022.
Both households and businesses have taken the brunt of the pandemic, and even though the Government has stepped up and offered the necessary financial support, coping up with the financial squeeze has been difficult during these rough times. UK households have been dealing with higher food and utility bills, with many of the poorer ones falling into the trap of fuel poverty ahead of this winter.
To counter the impact of rising inflation and soaring prices, the BoE has recently increased the interest rates from 0.1% to 0.25%. The move to raise the interest rate was made for the first time in three years in response to the rapidly rising prices. In 2022, the rates are projected to rise further, with a 0.25% hike expected as early as February. When the inflation levels went up to 5% in 2011, the interest rates were maintained at historic lows, which proves that the BoE is in a weaker position at present. This may be true as the UK economy has been facing turbulence due to a combination of Brexit-related issues and Covid-related restrictions.
Price hike to impact all
The budget of the households has been impacted, the energy prices have been skyrocketing lately due to excessive demand for oil and gas across the globe, which has pushed up the energy prices. Supply chain issues have been further aggravating the problem of inflation, and with a shortage of labour, materials, and haulage services, the prices of goods have soared immensely. Amid all these issues, the Government’s withdrawal of various support measures from hard-hit businesses, like ending hospitality’s reduced VAT, has resulted in a greater rise in prices by businesses to cover their losses. The pandemic and Brexit have together made the recruitment of lorry drivers and hospitality staff quite difficult.
As the living standard of Britons is plummeting due to increasing inflationary pressure, the wage demand is likely to rise and potentially result in a wage/price spiral, which could have a detrimental impact on the economy. The current inflation level, which is already way above the target rate of BoE, has been making Britons more and more pessimistic about the UK possibly moving towards economic stagnation.
The increase in prices of goods is inevitable with the increasing cost of inputs and transportation, and this phenomenon will be witnessed across markets in 2022. With the new Omicron variant of coronavirus causing massive disruptions in the UK economy, it’s hard to predict what’s in store for the UK economy this year, but the rise in prices is certain in the current circumstances and common people, as well as business, will have to look for means to reduce its impact as much as possible.
The technological advancements across the world have been spearheading the transformational shift to newer processes that are assisting in optimising the existing operations and end products. Contributing towards climate change, healthcare, clean energy solutions, food insecurity and several other causes, the technology landscape in the United Kingdom has been helping various enterprises from manufacturing to services to construction.
The ongoing processes certainly require a slew of advancements that can ameliorate the overall operations, subsequent to which the resultant objective can be achieved in a more efficient and affordable manner.
Bolstering the businesses and various other commercial setups with the applications of artificial intelligence (AI) and technology can assuredly help in levelling up the scale of operations, at a time when largest of the economies fear the resurgence of infection with the new Covid variant Omicron emerging at a sharp pace.
The World Health Organisation (WHO) has already warned about severe consequences following the outbreak of the new variant as a number of countries are contemplating the possibilities of reopening the international borders on a wider scale.
The tech startups operating with an objective of generating returns for the stakeholders while supplementing the environment have been highly preferred by the investors as the global forces join hands to bring down the carbon emissions, the decision that can comprehensively reduce the carbon footprint across the world.
The UK-based tech startups are helping in their respective capacities to provide solutions for the most pressing problems in the world including a number of climate change concerns, food insecurity and shortcomings in providing the best healthcare facilities. As a result of increased inclination of institutional investors and big-ticket money managers, the impact startups in the UK have managed to mobilise £2 billion investment in the present calendar year so far.
According to the Department for Digital, Culture, Media & Sport (DCMS), impact startups in the UK garnered an investment to the tune of £1.7 billion in the Covid-laden 2020. Surprisingly, the impact investment in the UK has more than doubled since 2018 with the quantum rising by 127%.
The impact startups based out of the UK remain aligned towards building a number of solutions to the United Nations’ Sustainable Development Goals. With more and more enterprises looking forward to incorporating tech-driven solutions within their operations, the proportion of startup investment has been progressively gaining pace with a large section of age-old conglomerates pledging to reduce the cumulative emissions from their operations.
With nearly half of the UK’s impact startups located outside London, the country is poised to witness all-round growth in the upcoming years as a number of startups have already attained a unicorn status, while many others are fast approaching towards the valuation of $1 billion. Locations including Briston, Sheffield and Horsham are adequately populated with impact startups that are based outside the City of London.
On a collective basis, all the impact startups employ more than 35,000 individuals. The combined valuation of these companies is approximately £50 billion. At the moment, there are a dozen of impact unicorns based out of the UK with six of them having main operations in London. Along with these, there are 22 impact futurecorns operating across the UK which are on track to achieve a billion dollar valuation in the forthcoming years as the nature of business remains aligned with high growth potential ideas.
The London based unicorns include Arrival, Octopus Energy, Babylon, Compass Pathways, Depop and Tractable. Ovo Energy and Vertical Aerospace are situated in Bristol, ITM Power in Sheffield, Ceres Power Holdings in Horsham, Britishvolt in Blyth and BenevolentAI in Cambridge. The impact startups located outside London effectively demonstrates the wide-reaching enterprises operating to ease the challenges in the clean energy space and other environmental concerns.
The Bristol-headquartered Vertical Aerospace is building flying taxis for commercial usage with zero-carbon emissions, Ceres Power Holdings of Horsham is working to introduce low-cost fuel cell technology that will pave the way for energy corporations to deliver next-generation clean energy, while Sheffield-based ITM Power is developing and designing hydrogen energy systems.
The niche area of operations makes these enterprises unique and highly sustainable in the long term as large-scale businesses contemplate various avenues to source clean energy solutions from such startups to optimise their in-house processes, productively increasing the efficiency and resultant output.
Amid the futurecorns, fusion power energy corporation Tokamak Energy and alternative protein startup Agri Protein are progressing with their respective objectives. These companies are highly likely to attain unicorn status as they take their offerings on the global platform.
The proportion of impact investing has been on a rising run across the world with the market participants backing the enterprises that are focused to safeguard the environment throughout their operations, and, at the same time providing lucrative opportunities of wealth maximisation for international stakeholders. In the UK itself, the number of impact startups that are actively operating has risen to 900 as innovative ideas across the country are able to secure capital from various sources.
The numerous applications of artificial intelligence, big data, blockchain technology and big data are effectively helping to develop next-generation clean energy solutions that can back the big conglomerates and multi-billion dollar corporations.
