UHY Hacker Young | Chartered Accountants

UK SMEs continue to hold back on business investment

25 October 2019

A recently published survey of SMEs in 13 economies across Europe, America and Asia has revealed a general lightening in pessimism about the global economy, but the UK continues to lag behind in plans for business investment.

The keystone of the economy

The importance of SMEs for the UK economy cannot be underestimated. According to a House of Commons Briefing Paper published in November of last year, there are 5.7 million private sector businesses in the UK, representing 99% of all businesses by number, 33% of total employment and 21% of business turnover. So business sentiment among SME owners – the confidence, or lack of it, they have, not only in their own enterprises, but in the future of their local, national and the global economy – shapes their investment decisions, which, in turn stimulates or hinders growth.

A report published this month by Bibbys Financial Services is therefore an important insight into the attitudes of SME owners in 13 countries: Belgium, Canada, Czech Republic. France, Germany, Hong Kong, Ireland, Netherlands, Poland, Singapore, Slovakia, UK and USA. Of the businesses surveyed, 28% were involved in exporting and 20% in importing. The headline finding was that more than 50% of SMEs had concerns about the global economy, but that this was not necessarily a negative, as two years ago more than two-thirds had concerns.

The usual concerns

General concerns were expressed over deceleration in China, potential recession in Germany, and Brexit. Respondents saw the three greatest threats to global economic growth as US political instability (42%), Brexit (35%) and rising material costs (23%). At the local level, SMEs expressed the usual problems: late payments by customers, tight cash flow, skills shortages, and lack of access to finance. There are some obvious inconsistencies, though. One in three thought that access to finance was good; 15% said that they were likely to apply for finance in the next 12 months. Overall, however, 85% said that they were planning to increase their investments in their business over the next year; the most popular source of finance being the reinvestment of profits. Of course, it is worth remembering that these statistics are collected from 13 countries with a wide range of finance options and business traditions.

The UK out of step

The survey looks at each of the 13 countries individually. The UK with its own particular political uncertainty may be a special case, at least for the time being. Of the countries featured, the UK came bottom of the league in respect of investment intentions. 73% of UK SMEs declared an intention to invest in their businesses, less than the survey average of 85% and well adrift from the leaders of the pack, USA and Czech Republic, at 92% and 90% respectively. The UK also bucks the trend in its attitudes towards the global economy. Although 30% of the country’s GDP depends on exports, the report quotes analysis by another company to the effect that business investment in the UK is 13% lower than would be expected if it had continued along the pre-referendum trend-line. This is hardly surprising, and it is reinforced by other findings.

The House of Commons Briefing Paper quoted above states that in 2018 the number of private companies fell by 27,000, the first fall since data became available in 2000. UK SME confidence has fallen 10% since 2017. 67% report nil business growth in the last 12 months and 27% claim that their turnover has decreased. When asked about the threats to the Global economy, UK SMEs had broadly the same anxieties as the other 12 countries but in a different order of importance: 66% saw Brexit as the number one threat; second was US politics (presumably including the trade war with China) (42%); third was the fear of rising interest rates (25%).

There is no doubt that the UK economy is going through challenging times. Rates of productivity remain disappointingly low, in spite of historically low unemployment rates. Costs of raw materials continue to rise as the pound falls against the dollar, and there is evidence that SMEs are relying on increased external financing not to invest but to smooth cash flows affected by stockpiling and other measures taken in anticipation of the UK’s departure from the EU.

No easy fix

The future is harder than usual to predict. In my view, the global economy will not resume its forward trajectory while there is an increasing populist appetite for protectionism in trade. Perhaps a truce in the trade war between the US and China would reverse this trend. An early conclusion to the Brexit saga would be a great relief, especially if the outcome is one that continues to favour cross-border movement of goods, services, ideas and capital. If we can return to ‘business as usual’, SMEs will regain the confidence to invest and to tackle the productivity problem.

We cannot tell you what the future holds, but we can advise how best to organise your business in order to be as future-proof as possible. You may consider preparing for the eventual upturn in the global economy by developing your export market. We have all the contacts, local and international, to assist you in this. Please get in touch at a.hulse@uhy-uk.com or complete our contact form.