Bursting The Balloon: U.K. SMEs Feeling Squeezed After Months Of Double-Digit Sales Growth

Is the party over before it has even started? Data released this week suggests that following a wave of post-pandemic optimism, Britain’s small and medium-sized enterprises (SMEs) are seeing sales squeezed while wages are rising. Put simply, it’s looking tough out there – particularly when you look beyond the heady world of VC-tech companies and contemplate the wider SME economy.

In truth, headwinds have been gathering for some time. On the face of it, the U.K. economy emerged from the worst months of the pandemic looking fairly robust. Growth returned quickly and – as the government never tires of pointing out – the unemployment rate is, in historical terms, very low at around 3.8 per cent.

But it is becoming increasingly apparent that the low joblessness figures are only in part due to job creation. There are currently over one million unfilled vacancies in the U.K. economy, a figure that points to acute labor shortages. As is the case elsewhere in Europe and the U.S., the so-called great resignation is playing a part in this, but in Britain, this has been exacerbated by the government’s taking a hard line on European immigration in the wake of Brexit. All this has been putting upward pressure on wages at a time when other costs are also rising.

And if a survey published by accountancy platform, Xero in collaboration with Accenture is to be believed, demand is beginning to come under pressure.

The good news is that across the board, SME sales are still growing. The bad news is that growth has slowed markedly. After 13 months of double-digit growth, the new data suggests that the average is now 6.3 percent.

But even this figure is deceptive. In the retail sector, SME businesses saw sales fall by 4.8 percent, evidence that in the face of nightly headlines about unaffordable energy prices and (as the Bank of England governor, put it) a coming food price “apocalypse” due to the war in Ukraine, consumers are cutting back on discretionary spending.

Good And Bad News

There was better news in manufacturing where sales grew by 6.4 per cent and construction also kept its head above water (just) with growth of 3 per cent.

So, you could argue that when you look at the overall picture, SMEs aren’t doing too badly. Yes, growth is slowing but for the most part, we’re not looking at contraction.

But the elephant in the room is wages.

The survey finds – and this is in line with government figures – that SME wages were up 4.4 per cent in April when measured against the same month a year earlier. This is where things are beginning to look dangerous. In an economy with one million unfilled vacancies, SMEs are having to pay more to attract staff at a time when they can ill afford it.

And the longer-term problem is that wage pressure is expected to rise further. With inflation running at 9.0 percent, living standards are falling. In theory at least, workers will want higher settlements to keep up.

This, in turn, is likely to prompt the Bank of England to raise interest rates further, adding to the cost of borrowing. This will not only dampen consumer spending, but also make it tougher for businesses seeking to raise debt capital.

A Perfect Storm

In other words, what we’re looking at is a perfect storm for SMEs. And with late payments also rising, Xero’s Managing Director for U.K. and EMEA, Alex von Schirmeister says many large corporate businesses are not helping matters. “This is a warning sign of what’s to come,” he said. “Small firms are being hammered by a slowdown in consumer spending and a slowdown in getting paid what they are owed. Late payments should be referred to as ‘unapproved debt’. Small businesses are pushed to the cliff edge by large firms who hold on to their suppliers’ money. Even a single unpaid invoice can set off a chain reaction that leads to delays, instability, and dire consequences across entire supply chains.”

When – as I do – you write a lot about VC-backed tech companies, it’s easy to get carried away by a narrative suggesting that the pandemic has accelerated the growth of digital platforms and thus improved the outlook for innovation economy companies. But that’s not a narrative the majority of SMEs can necessarily buy into. Nor can any entrepreneurial business escape the impact of falling demand and rising wages.