UK economy’s latest headache is rising business borrowing costs
BRITISH businesses are already hurting from soaring energy costs and rampant inflation. Now, higher borrowing costs are adding to the pain and increasing the risk of a recession.
About half of small and medium-sized businesses said the pricing and availability of loans was “poor” in the three months through September, according to a poll by the Federation of Small Businesses (FSB). That’s the lowest in seven years and comes as one business warns that the cost of credit has more than doubled in just over 12 months.
The survey is the latest sign of the bleak outlook for the UK economy, a headache for new Prime Minister Rishi Sunak, as he seeks to stabilise the country’s finances after September’s mini Budget sent borrowing costs spiralling. Adding to the pain, the cost of living is rising at the fastest pace in four decades and consumer sentiment is near record lows.
“We are seeing a lot of small firms fighting for survival now,” said Michelle Ovens, founder of trade group Small Business Britain. “The spike in interest rates adds another big rise to the surge in costs that small firms are facing from all angles, particularly around the vital business artery of cash flow.”
Swaps tied to central bank meeting dates see the Bank of England’s key rate peaking at just below 5 per cent in 2023 even as the recent market turmoil recedes. While that’s lower than in recent weeks, the benchmark was just 0.1 per cent last year.
Losing money
Any rise in insolvencies at SMEs would have a knock-on effect on employment as about 60 per cent of the country’s private sector workers are employed by smaller firms.
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The hair and beauty sector is one area that’s already seeing the impact of rising costs, with just 35 per cent making a profit in September compared with 44 per cent in July, according to a survey by the industry’s federation.
Restaurant and hotel owners are also hurting. Kingdom Thenga, the owner of several hospitality businesses in the Chester area of northern England, has put on hold plans to take out a mortgage to buy a pub he’s currently leasing.
An investment in a terrace and retractable roof to boost activity at another venue has also been delayed until after Christmas at the earliest, he said, because consumer demand has fallen sharply. Borrowing costs have more than doubled over the last 12 to 18 months, he added.
Disposable income
“The mini Budget was an absolute disaster for small businesses,” Thenga said. “People’s disposable income was pretty much destroyed in an hour because their mortgages went up by £300 (S$490) to £400, which is money that they would be spending in hospitality, retail, going out, on holidays.”
Small firms had already been feeling the pinch because so many took up variable-rate emergency loans during the pandemic, according to FSB National chair Martin McTague.
Confidence collapse
Business confidence has “collapsed” as companies become more nervous about the economic outlook, S&P Global Market Intelligence chief business economist Chris Williamson wrote earlier this week. The financial analytics firm said that output is now falling faster than at any time since the 2009 financial crisis if the pandemic is excluded.
The PMI reading “showed businesses just started quoting higher interest rates as a reason for a more pessimistic outlook”, said Ana Andrade at Bloomberg Economics. “As rates increase further and feed through the wider economy, they’ll start weighing on business sentiment more pronouncedly.”
Lower investment by companies is one of the signals pointing towards the UK economy contracting in the fourth quarter, she added.
“Small businesses tend to traditionally be nervous about taking on debt and this rise in rates will only reaffirm those fears,” said Ovens at Small Business Britain. “The knock-on impact is that it will stop many investing for growth.” BLOOMBERG
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