Mid-sized UK businesses cut investment as recession looms – but profitability improves as businesses pass on rising costs to customers
- Just over two-fifths of mid-sized companies plan to invest in the next six months
- It is the lowest since the start of last year, according to a survey of 700 chefs
- But profit margins have improved over the past three months as companies have found it easier to pass on price increases to customers.
Mid-sized UK businesses are slashing investment plans as soaring inflation and interest rate hikes erode business confidence.
Just over two-fifths of mid-sized companies plan to increase their capital expenditure over the next six months, according to research from audit firm RSM UK, the lowest since records began in early 2021.
However, the survey of 700 bosses found that profit margins have improved over the past three months as businesses have found it easier to pass on price increases to customers.
UK mid-sized businesses are also slashing their hiring plans
The Middle Market Business Index (MMBI), which covers companies with an annual turnover of between £10m and £750m, found that 44% of respondents were able to raise prices in the last quarter, against 40% in the spring.
The spread between input and output prices has also improved significantly and remains above its two-year average, suggesting that pressure on profit margins has eased.
Businesses face skyrocketing energy bills, but prices for many other commodities, such as oil, wheat and aluminum, have come down significantly in recent months, RSM said.
But the recent deterioration in the UK economy is affecting businesses, which are also slashing their hiring plans.
Just over a third say they are recruiting more staff, compared to half at the start of the year.
The corporate tax cuts announced by the government will do little to encourage businesses to invest, the report says, with an additional hit coming from the government’s plans to inflict more austerity on Britain. Brittany.
“As there is very little evidence that the corporate tax cut is translating into increased business investment, we expect a 3% decline in business investment next year,” said Thomas Pugh, economist at RSM UK.
Spending cuts […] could further reduce business incentives to invest
“What’s more, as the focus shifts from tax cuts to spending cuts, public investment should bear the brunt of efforts to put public finances back on a more sustainable footing.
“This could further reduce incentives for businesses to invest,” he added.
The UK already has the lowest business investment in the G7 and is still nearly 10% below its 2016 level, before the Brexit referendum.
Productivity has also been lower than most other major economies in recent years.
Lack of investment is likely to make matters worse, as it has been a key driver of weak UK productivity growth over the past decade, according to the report.
Businesses have been hit hard by volatile energy prices because their consumption is not included in regulator Ofgem’s price cap, which only covers homes.
After mounting pressure and the introduction of a household energy cap, ministers announced last month that energy prices for businesses would be capped until March 2023.
Pugh said that puts them at risk of a precipice in the spring and “productive investments being postponed or canceled and viable businesses failing, making the economy permanently smaller.”
The survey also found that more businesses expected to report lower revenue over the next six months as the cost of living crisis hits demand.
“Soaring energy prices and inflation mean that real disposable income will suffer its biggest squeeze on record, with the inevitable result that discretionary consumer spending will continue to fall as an ever larger share of people’s finances households is diverted to the cost of living, resulting in a recession at the end of this year and a long period of weak growth,” Pugh added.