Small Businesses React to Slowing UK GDP Growth

SMEs offer their reactions to the latest GDP figures, which show the UK economy is still struggling to return to pre-pandemic levels.

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New GDP figures have been released and, for the most part, the news isn’t good. Improvements in the hospitality, entertainment and health sectors have been outweighed by drops in output from the UK’s crucial manufacturing and construction industries.

The UK’s economic recovery has slowed, leading to lower growth predictions. In short, getting back to where we were will take much longer than hoped.

This news piles more pressure on SMEs already grappling with shortages of labour and goods, rising fuel prices, and an impending increase in National Insurance contributions.

Here, we take a closer look at the GDP figures, and give a snapshot of how small businesses are feeling about the state of the UK economy.

What do the Q3 GDP figures show?

The ONS (Office of National Statistics) official GDP figures show that UK GDP grew by 1.3% in the third quarter of 2021 (July to September). This represented a big drop from the 5.5% growth recorded in the second quarter of 2021.

To some extent this was to be expected – the Q2 figures were boosted by a reopening of the nation’s shops, bars and restaurants after a large enough part of the population had been vaccinated against COVID-19.

However, that period now seems like a short-term jolt rather than a more long-term pattern of strong growth, with UK GDP currently 2.1% below its pre-pandemic peak (which was recorded in Q4 2019).

The reasons for this will be common knowledge to most small business owners: hiring difficulties, goods shortages and spiralling fuel prices are all contributing to the drop.

How are different sectors performing?

Of course, this picture masks huge variation between different sectors.

Strong growth was recorded by:

  • Accommodation and food services – This sector posted a 30% improvement and benefited hugely from the reopening of indoor hospitality (to varying degrees) across the UK from 19 July 2021
  • Arts, entertainment and recreation services – Driven by the same factors, this sector grew by 19.6% compared to the previous quarter
  • Health sector – This was another sector to get a boost from the reopening trend, increasing by a modest 3.5% as GPs and other medical professionals began to see more and more patients face to face

However, there was much less positive news for:

  • Construction – Construction output fell by 1.5% in Q3, as construction companies grappled with rising input costs and supply issues
  • Manufacturing – Overall, the UK’s manufacturing sector output dropped by 0.3%. An 8.2% decline in the manufacture of motor vehicles in September was a key contributing factor

While these may seem like relatively modest falls, these are key sectors for the UK economy.

In The Guardian’s Q3 economic analysis, Philip Inman described both as “bedrock industries” and noted that “both sectors will likely contract for a second successive quarter in the final three months of 2021, fulfilling the definition of a recession for each one”.

How does this compare to other countries?

With GDP 2.1% below its pre-pandemic peak, the UK is lagging behind other major European economies.

Germany is 1.5% off the GDP high it recorded before the pandemic hit, while Italy is 1.4% off.

France – which is often considered the country most similar to the UK economically and which faced very similar challenges with COVID-19 – is only 0.1% below pre-pandemic values.

How have business groups reacted?

Quoted in the Evening Standard, CBI (Confederation of British Industry) lead economist Alpesh Paleja offered a balanced take, recognising that British businesses are currently operating in a very difficult environment:

“It’s encouraging that the economy maintained some momentum in September. But there’s no denying that this rounded off a tough quarter for businesses, with supply constraints biting hard.

“A combination of rising COVID cases and shortages of raw materials, components and labour came together to present significant headwinds to growth.”

From a small business perspective though, FSB (Federation of Small Businesses) National Chair Mike Cherry had a far more negative view:

“These deeply concerning figures point to the scale of the mammoth task that lies ahead in securing a sustainable economic recovery.

“As they attempt to focus on getting back to full strength, small firms are up against supply chain disruption, spiralling costs and debilitating skills shortages.

“The drop in retail sales is especially worrying to see as we head into Q4 – we’d urge everyone to get behind their favourite small businesses over the coming months in what will be a make-or-break festive season.

“The Budget was the government’s chance to bring in measures to assist small firms with rising employment, tax and shipping costs – it missed that chance.”

What are SMEs saying?

For the most part, the views of SMEs reflect this pessimism – with a variety of small business owners picking out the below challenges to their trading.

A lack of business confidence

Maddy Alexander-Grout, the CEO of money-saving app business My VIP Rewards, is concerned that a lack of confidence in the economy is prompting small businesses to adopt a cautious mindset and this, in turn, is holding back the country’s economic growth:

“I'm not sure the UK consumer is as strong and confident as these figures suggest. A lot of people across the thousands of businesses we work with are still buying cautiously, which is a real problem.

“I am optimistic that next year things will start to return to a relative normal, but it's a lot slower than it usually is this close to Christmas. For now, the average small UK business is still on red alert.”

Supply chain issues

For Liz Barnes, the Managing Director of biodegradable body wipes manufacturer FreshWipes, supply chain issues and labour shortages have been huge challenges:

“Here at FreshWipes, we've had more supply chain issues this year than all of the toilet roll manufacturers put together during COVID-19.

“Just when we thought nothing else could go wrong with the supply chain, we've now been hit with lengthy delays at Felixstowe (due to massive port congestion) on our body wipes.

“Since January, we've already tackled sea-container prices more than quadrupling, extended shipping times, the Suez Canal fiasco, lack of available shipping space and then a shortage of HGV drivers to pick up the containers when they do finally arrive. Ironically, HGV drivers are big users of our biodegradable body wipes!

“So far, we've tried to absorb many of the extra costs and not pass them on to our customers, but with no sign of things improving until at least spring 2022, we can't hold our prices forever. It's certainly been an annus horribilis for SMEs, particularly those that rely on imported goods.”

A boom area

Of course, not all sectors are struggling, and some areas are even thriving. From a personal perspective, Jeffrey Longley, a director at Able Electrical, is reaping the benefits of the rapidly growing popularity of electric cars.

However, taking a broader view, he still recognises that these are very difficult circumstances for many SMEs:

“The economy is bouncing back at varying rates within different sectors. Luckily, we install electric car chargers and are flying.

“Business friends in hospitality, though, are struggling and the general feeling is they will not make it as they built up far too much debt during the pandemic.”

Final thoughts

Overall, it’s hard to avoid the sense that, as Ensurety Managing Director Keith Budden puts it, small businesses have “a long, hard winter ahead”.

In terms of GDP, the growth recorded in Q2 slowed significantly in Q3, as the surge that accompanied the reopening of UK shops, bars and restaurants dropped off as supply and labour issues hit hard.

With indoor hospitality reopening in July, both the accommodation and food services and the arts, entertainment and recreation services sectors recorded very strong growth, but the output of two of the UK’s major industries – construction and manufacturing – fell compared to the previous quarter.

In terms of recovering to its pre-pandemic peak, the UK is lagging behind other European economies.

It’s pretty clear from talking to UK SMEs what the issues are – serious supply chain issues, a lack of business confidence, and difficulties hiring staff.

And all this comes against the backdrop of looming increases in National Insurance and the National Living Wage, financial burdens that the country’s small businesses could (to say the least) really do without.

The traditional Christmas rush should provide some respite. But it remains to be seen whether that, too, may be negatively impacted by supply and labour issues.

As ever, to survive and thrive, UK SMEs will need to be agile and alert to their customers’ changing needs and desires, and should try to ensure that they have some form of contingency plan if sales don’t reach expectations.

We’ll continue to cover all the major issues at Startups, and give expert advice to help your business get through this difficult period.

Alec is Startups’ resident expert on politics and finance. He’s provided live updates on the budget, written guides on investing and property development, and demystified topics like corporation tax, accounting software, and invoice discounting. Before joining, he worked in the media for over a decade, conducting media analysis at Kantar Media and YouGov, and writing a wide variety of freelance pieces.

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