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For that reason, some may see their marketplace increase significantly due to a new engineering project in the vicinity, others from the advantageous exchange rate. However, what we can say is that SMEs are, in general, much more vulnerable to the vagaries of the economy due to the greater restrictions on cash-flow and tighter margins(1).
In general, the second quarter of 2008 has seen a contraction in the services sector(2) and a marked decline in confidence nationally from the first quarter. It should come as no surprise that all workload reports dealing with the SME sector expect 2008 to be a difficult year(3). Nor is this lack of confidence consigned to businesses, as the key consumer confidence indicator has hit a record low this quarter(4).
There are some silver linings in the form of record retail sales (within 24 hours of record consumer pessimism) and a core inflation rate that has remained static at 1.4 to 1.5%, which suggest that there is at least an argument for not raising interest rates(5). However, the real cost of living has increased by just over 10%, thereby reducing disposable income for spending on products and services. The Shell haulage agreement and the union response to this increase may yet lead to significant wage inflation, but the latest data on wage agreements from the EEF, the industry body for engineering and manufacturing employers, puts current wage inflation at around 3%(6).
Construction, in particular, has been hit by the lack of confidence nationally and by the impact of fuel costs, which have a multiplier effect through the supply chain. The cost of fuel has an impact of most small businesses directly or indirectly and this has been exacerbated by bureaucracy. The cost of doing business is at its highest for a generation, with the CBI reporting that materials and unit costs are at their highest levels for 20 years(7).
The length of the current slowdown in the economy is as yet uncertain, but there are moves to reduce some global economic inhibitors to growth, such as reducing fuel prices by increasing production and, more importantly, China's decision to reduce fuel subsidies. These moves may make some businesses more viable, but the major concern is the current idiosyncratic economic leadership, which needs to inspire confidence amongst smaller businesses. There seems to be no real focus on the plight of smaller businesses within the economy, nor a prioritising of measures that will reduce the time and cost implications of red tape(8). Already significant numbers of SMEs have been contacting the FPB and other specialist organisations about the process of reducing staff as a way of lowering their cost bases(9).
BDO Stoy Hayward(10) has predicted an increase of 20% over the next year of companies going into administration, of which a significant proportion will be viable businesses. Even though the economy is likely to be in better shape at the moment than the confidence indicators are showing, this predicted increase of 20% is beginning to look like an underestimation, particularly as the latest increase in jobless totals already includes a significant proportion of individuals who were previously self-employed construction specialists(11)..
While some economists believe that the slowdown will continue into mid-2009, and perhaps beyond, similar predictions were made after the burst of the dot-com bubble in 2001, when the failure of the UK economy to decline according to their predictions was attributed to small businesses and, in particular, 'white van man'. Much will depend on the next Budget and whether the Chancellor decides to ‘Think Smallest First', as advocated by the FPB.
(1) The FPB is currently undertaking a consultation exercise on late payment. To contribute, go to www.fpb.org/page/105/Surveys.
(2) CIPS Quarterly Survey.
(3) Workload surveys include CBI Quarterly SME Trends Survey, ICEAW Business Monitor, BCC quarterly economic survey.
(4) Nielsen/BRC UK Consumer Confidence Index.
(5) Analysis by David Smith in The Sunday Times 22.06.08.
(6) EEF June 2008 Pay Bulletin.
(7) CBI SME Trends analysis of Unit Price data.
(8) Anatole Kaletski (The Times 19.06.08) "the biggest worry has been Mr Brown's surprising combination of weakness and short-termism since he became Prime Minister".
(9) Analysis of calls to the FPB's helpline.
(10) BDO Stoy Hayward, IndustryWatch Press Release 16.06.08. (11) ONS Unemployment Statistics April 2008.
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