‘Light at the end of the tunnel’ for businesses, but slowcession still a risk, warns RSM UK

RSM UK, one of the UKs biggest business advisory firms, has warned that although there is “light at the end of the tunnel” for struggling UK firms, companies should still be aware of the risks of a “slowcession”.

RSM UK’s latest Middle Market Business Index (MMBI) shows that 39 per cent of businesses feel the economy has improved over the last quarter, and over half (54 per cent) expect the economy to continue to improve over the next quarter.

Government insolvency figures from February, however, have risen 17 per cent from the same month in 2022, with 1,518 businesses in insolvency. This figure is 33 per cent higher than the same month in 2020, prior to the pandemic.

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Speaking of the issues still faced by businesses,Thomas Pugh, economist at RSM UK, said: “If you’re looking at the big picture, a lot of the issues around energy prices and input costs that businesses are facing have now started to unwind, but that will obviously take time to feed through into the domestic market.

Thomas Pugh, economist at RSM UK, has warned that the UK could still face a 'slowcession' despite economic outlooks improving.Thomas Pugh, economist at RSM UK, has warned that the UK could still face a 'slowcession' despite economic outlooks improving.
Thomas Pugh, economist at RSM UK, has warned that the UK could still face a 'slowcession' despite economic outlooks improving.

“Input price inflation has fallen quite sharply, and will continue to fall - but that doesn't mean that input prices are going to go back to where they were - it just means they are going to stop rising at the rates that we’ve seen.

“Energy prices have fallen back a lot, but they are still three times higher than they were before the pandemic, so we’re still looking at substantial absolute cost increases even if inflation rates are falling.

Despite these issues, RSM’s MMBI shows that 59 per cent of middle market firms plan to raise capital expenditure over the next six months. 61 per cent of businesses said they are planning to recruit, and almost half said their profits were up compared to last year.

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Mr Pugh noted that although businesses experiencing a rebound should remain cautious, current forecasts predict that an oncoming recession would be relatively mild by historical standards, with a predicted drop in GBP of 1 per cent, compared to 22 per cent during the pandemic. Mr Pugh added that any oncoming recession would feel more like a “slowcession, than a typical recession”.

He said: “For the first half of the year, the message to businesses is definitely caution. We’re not anticipating a rebound in customer spending this year, and it will probably be this time in 2024 before spending starts to get going again.

“But as recessionary periods go, this is going to be pretty mild and short, so it's not a case of just batten down the hatches and hibernate, its a case of get through this relatively short period of struggle and this time next year things should start to look up.”

Gareth Harris, restructuring partner at RSM UK’s Leeds office, noted the strain on Yorkshire agriculture and food businesses.

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He said: “Locally, it feels like there's much more stress related to food manufacturing, because of the weight of that in our local economy. We have a lot of food businesses - partly because we have a big agricultural sector - and that has been a particularly challenging place to be.”

He added: “Businesses are now also holding more stock than they were previously. The pandemic combined with the war in Ukraine has shown the fragility of the just-in-time supply chains, but it costs people more to hold on to stock.

“Supply chain issues and transport costs are starting to ease, so there's light there at the end of the tunnel, but if you’re sitting on three times more stock than you would usually be sat on and you can't sell it, it's a real challenge.”

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