British businesses could be facing a winter of discontent, after inflation has hit a 40-year high and consumer confidence remains at an all-time low.
Rising inflation, combined with weakened consumer confidence, soaring energy costs and a wage slide, is a recipe for a tough winter for British businesses despite the sweltering summer temperatures.
“Certainly SMEs will be hit harder [by inflation], as they don't have the luxury of price inelasticity that big players in basic goods and services industries do, so it will be difficult for them to increase prices as the costs of goods sold increase,” Victor Rivera, a partner at Aluna Partners and part-time professor of finance at Universidad del Rosario, told Proactive.
“On the positive side, the UK has a strong base of technology companies that sell not only in the UK but more broadly and those businesses will show more resilience.
"More importantly, the jobs that technology companies can support will be fundamental for the sustainability of the UK economy over the next 12 months.”
A consumer pinch is expected to be felt by and reverberate through businesses, after a fresh spike in UK Covid-19 cases that led workers to take time off over the summer.
Inflation is predicted to reach new highs of 11% in the autumn, according to a recent report by Ernst & Young, up from a record high of 9.4% recorded for the year to June.
EY economist Mats Persson further told the Times over the weekend that inflation could even go as high as 15% in the winter if Russia cuts off energy supplies.
The Consumer Prices Index, which measures annual price hikes in consumer goods, was up 9.4% for the year through to June, compared to previous highs of 9.1% in May and 9% in April.
The Office for National Statistics said this was the highest annual CPI inflation rate in the series since records began in January 1997.
According to the ONS, the largest movements in the annual CPI inflation rate in June 2022 were from transport mainly due to price rises in motor fuels and food, closely followed by the hospitality industry.
Motor fuel prices rose 42.3% in the 12 months to June, according to the index, as sanctions on Russian oil caused supply shortages in oil and gas.
Yet transport and hospitality industries are not the only sectors expected to face difficulties this winter.
During the past month, a swathe of UK companies have issued profit warnings across the retail, gaming, and insurance industries, many of which attributed these warnings to weakened consumer confidence.
Made.com Group PLC (LSE:MADE), Currys PLC (LSE:CURY) and Ladbrokes owner Entain PLC (LSE:ENT) each cited worsening consumer confidence, the rising cost of living and uncertain consumer spending among the reasons for their respective downgrades.
Retailers Halfords Group PLC (LSE:HFD), Zalando and ASOS PLC (LSE:ASC) made similar profit warnings, while insurance firms Sabre Insurance Group PLC (LSE:SBRE) and Direct Line Insurance Group PLC (LSE:DLG) cited inflation as the reason behind their latest forecasts.
In the hospitality space, All Bar One chain owner Mitchells & Butlers PLC (LSE:MAB) warned that its balance sheet would be impacted by inflation after recent events took a toll on drink sales. Franco Manca owner Fulham Shore PLC (AIM:FUL) meanwhile delayed plans for a dividend until the lingering effects of the pandemic are over.
The UK Consumer Confidence Index plummeted to a new level of -41 in June and July, the lowest since records began in 1974, according to market researcher GfK.
The firm’s client strategy director Joe Staton said the impact of “soaring food and fuel prices and rising interest rates continues to darken the financial mood of the nation”.
In May, the firm said: “The outlook for consumer confidence is gloomy, and nothing on the economic horizon shows a reason for optimism any time soon.”
When housing costs were included, households faced the highest inflationary pressure on income since 1994 following the last global recession since the pandemic.
The CPI including housing costs rose by 8.2% in June, up from 7.9% in May, with household services such as electricity gas and other fuel prices and housing costs, as well as transport and motor fuel among the biggest rises for households.
The cost-of-living crisis continues to plague UK households.
According to the ONS, nine in 10 households said they had been affected by the rising cost of living.
Ernst & Young’s latest Future Consumer Index showed that nearly half of low-income respondents said that they felt financially worse off compared to February, and many expect their situation to worsen.
The firm cut its economic growth forecasts last week but expects the UK economy to narrowly avoid recession as long as there are no further energy price shocks and the Bank of England doesn’t tighten monetary policy “too quickly”.
EY ITEM Club now forecasts that the economy could rebound to 2.4% growth in 2024, above prior predictions, but said in its summer forecast that business investment is “unlikely to return to its pre-pandemic levels on a sustained basis until 2025”.
It said this was due to the continued “squeeze on households’ real incomes from higher inflation, ongoing supply chain disruption, borrowers facing the consequences of a series of interest rate rises and the rise in asset prices during the pandemic now subsiding”.
With a slew of half-yearly financial statements due to be released in the coming week on both sides of the Atlantic, more profit warnings may surface later this week.