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The Real Economy: 71% of Businesses Ready for Recession

5th January 2023

 

Recent research suggests almost three-quarters of UK businesses are feeling resilient despite the exceptionally tough economic outlook. According to the latest RSM UK ‘The Real Economy Report’ 71% of middle market businesses say they are prepared to face the recession.

While businesses seem confident in their ability to navigate the economic headwinds, RSM’s research showed almost half of businesses (44%) now feel rising energy prices present their biggest risk, while increased cost of finance (30%) and rising staffing costs (30%) are equally viewed as their second biggest. Supply chain disruption also continues to be considered a threat by over a quarter (28%) of businesses.

Record inflation this year has forced nearly half (44%) of businesses to increase their prices, and almost a quarter (24%) are unable to pass this additional cost on to their customers. Almost half of those businesses experiencing increased cost pressures expect this to last at least 12 months.

Paul Anthony, regional managing partner, RSM South said: ‘Record inflation, energy price shocks, the Brexit aftermath, supply chain issues and the pandemic have all combined to create a perfect storm for middle market businesses in recent months. Some sectors, such as retail and manufacturing, are undoubtedly battle scarred by months of increased costs and barriers to trade, but others – particularly those that are not so reliant on energy – such as financial services, legal and fintech, are coping well and even spotting the opportunities in the current tough economic climate.’

RSM’s report shows middle market businesses are demonstrating resilience and fighting back with a range of measures to stay afloat. These include more than a third (39%) improving energy efficiency, around a third enhancing operational efficiency (32%) and seeking cheaper supplies (31%) and over a quarter (26%) reducing their capital expenditure.

Almost half (43%) of businesses said they were facing higher labour costs, with almost a third (31%) considering making redundancies to reduce staff costs.

Many say they are also looking to access finance, either to weather the recessionary storm ahead or maximise opportunities, such as acquisitions of struggling companies. Over a third (36%) want to access finance to make capital investments, while more than a quarter (29%) want to undertake opportunistic acquisitions.

Worryingly though, more than a quarter want to access finance to address concerns over breaking exiting covenants, suggesting they are at risk of defaulting on their financing obligations.

Jason Stone, head of special situations, mergers and acquisitions, RSM UK adds: ‘The question of financing and investment options will be a consideration for many businesses next year. Stronger companies will capitalise on the opportunity, by making strategic acquisitions for future growth. Companies with a more worrying debt structure should seek advice early to avoid the spectre of breaching financing obligations and potentially ceasing to trade. Both types of companies are increasingly aware that growth does not necessarily require conventional financing, with many companies open to alternative financing methods and equity investments.’