Is a recession looming?

Updated: 6 July 2022
Jonathan Andrew
Jonathan Andrew
Global Chief Executive

At the European Central Bank conference in Portugal last week, Andrew Bailey, Governor of the Bank of England reiterated the Bank’s already stark estimate that inflation will rise above 11 percent in the Autumn.

We’re now amid an almost perfect storm, with rapidly rising inflation, persistent supply chain issues and labour shortages, which – combined – look set to push the UK into recession this year.

Furthermore, with hot-off-the-press resignations of Chancellor Rishi Sunak and Health Secretary Sajid Javid (and likely more to follow), questions over the Prime Minister’s future are once again in the spotlight. Where Johnson goes next politically is anyone’s guess, but the inevitable snap appointments (Nadhim Zahawi and Steve Barclay) and possible reshuffle will do little to focus Parliament’s attention on the economy, in the short-term at least.

And this is where focus is desperately needed.

While residual supply chain impacts of Covid-19 remain, we are now seeing a shift in the primary underlying issue from the pandemic to Russia’s invasion of Ukraine, driving up both energy and materials costs. This has led to a cost of living crisis not seen in this country for almost four decades. As prices across the Eurozone rocket, recent PMI data shows orders at UK factories falling for the first time in 17 months – a heady mixture.

Though our latest Business Factors Index – charting the turnover of more than 2,000 UK SMEs – shows modest growth throughout the second quarter – it’s inevitable that rising costs, combined with labour shortages and political uncertainty will hamper SME growth ambitions over the summer months. I expect to see this come to pass in the second half of the year, coinciding with a possible interest rate rise, putting further pressure on borrowers who are already seeing the spending power of loans diminished in real terms.

SMEs, however, are resilient.

Our recent study of 500 UK SMEs highlighted that while there are significant concerns about the economy and conflict in Europe, a stoic determination remains. More than eight in ten said they plan to invest in their businesses this year, and a similar proportion (unsurprisingly) say they are confident about their business prospects in 2022.

Perhaps an encouraging by-product of an otherwise damaging two years, many businesses are now more receptive to seeking the support they need from the public and private sectors alike: 84 percent say they are actively in search for business advice, help recovering moneys owed and logistics support.

Furthermore, while a high proportion of UK SMEs have previously been categorised as “permanent non-borrowers”, essential support offered throughout the pandemic by way of Government loans has undoubtedly encouraged many to think differently about how they finance both day-to-day operations and growth. More than two-fifths (44%) say they are more likely to seek external finance than before the pandemic.

However, with the Government’s Recovery Loan Scheme closed to new business as of 30 June, there are fresh concerns that the high street’s appetite to lend to SMEs will begin to dissipate, with many lenders expected to make significant changes to their credit policies over the coming weeks. Topping-off a particularly grim end to the second quarter, Brian McBride, newly appointed President of the CBI recently warned: “For individuals and for businesses, we are in for a tough time.”

There’s little denying that challenges facing both individuals and businesses are significant. But as the possibility of a recession in 2022 becomes more likely, there are opportunities for SMEs to insulate themselves from the effects of a downturn. Reviewing supply chains, tightening credit control processes, mitigating currency fluctuations, understanding ways to unlock value from existing assets and managing costs accordingly are all factors SME owners and decision makers can start to consider.

As the CEO of a specialist SME funder, it’s perhaps unsurprising for me to advocate that business owners carefully consider the financing options available to them. However, forms of finance such as invoice finance provide greater benefit to SMEs than just cash alone. Unlocking value already held within a business is a key advantage over loans or overdrafts, but of equal benefit to time-poor SME owners is support in helping to collect customer payment, and provide structure and clarity around credit control processes.

In these challenging and politically uncertain times, it is those SMEs that can plan ahead, leverage the support available to them, and – ultimately weather the storm - that will be best placed to take advantage of opportunities presented.

Equally, it is these businesses that will see the UK economy through a recession, which now seems inevitable.