UK businesses are bracing for a difficult winter amid rising inflation and higher energy bills.
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LONDON – The doors of The 25, a Torquay-based boutique bed and breakfast on the UK’s south-west coast, are now closed for the winter period. But this season they stay closed longer than usual.
With soaring energy bills and higher costs putting pressure on British businesses, owner Andy Banner-Price has delayed the reopening by a month until well into spring.
And while advance bookings from repeat guests remain strong, new inquiries are down 50% and bookings down 15% from previous years, painting an uncertain outlook for the year ahead.
“I suspect a lot of people are waiting because there’s so much uncertainty in the economy right now,” Banner-Price told CNBC.
The latest economic data from the UK brought some clarity to the picture on Friday – albeit on the downside.
Many (companies) aim to get the Christmas frenzy behind them and then close their doors in January.
Tina McKenzie
Chair of Policy and Advocacy, Small Business Association
Britain’s gross domestic product (GDP) shrank 0.2% quarter on quarter in the three months to September, official figures showed, against a growth rate of 0.2% in the second quarter of 2022. A second consecutive quarter of negative growth would be forthcoming indicate that the UK has entered a technical recession.
The negative data adds to the country’s subdued economic outlook and already depressed consumer sentiment.
“It’s a cumulative effect of bad news every time you turn on the TV or open a newspaper,” he said.
“I think we sometimes talk our way into a recession,” he continued. “Negative growth will only make some people more concerned about their jobs and more cautious about spending.”
Britain’s longest recession ever
The Bank of England warned last week that Britain is now heading into its longest recession on record a century ago.
The central bank expects GDP (gross domestic product) to fall further into 2023 and into the first half of 2024. The projected two-year downturn will be “very challenging,” the bank said, and will cost around 500,000 jobs and put pressure on already struggling businesses and households.
A woman walks past derelict, closed shops in Romford, England.
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Tina McKenzie, policy and advocacy chair at the Federation of Small Businesses, said many small and medium-sized UK businesses are now “under attack from various quarters”, citing reduced access to cash and labor and inflationary pressures.
UK consumer inflation hit a 40-year high of 10.1% in September while producer prices remained stubbornly high at 20%. The BOE has warned that interest rates, currently set at 3%, will now likely need to rise further than previously forecast to push inflation back towards its 2% target.
Still, the worst effects of an upcoming downturn may not become apparent until the first or second quarter of 2023, McKenzie said. In the meantime, many businesses — especially in hospitality and retail — are just waiting.
“Companies are under enormous pressure. A lot of people want to get the Christmas buzz over and then close the doors in January,” McKenzie told CNBC via Zoom call.
“Strong and Scary”
More than a third (35%) of Britain’s hospitality sectors say they are at risk of closure early next year due to higher costs, rising energy bills and weaker consumer spending, according to a survey of operators released last week.
“It’s gross and scary,” said David Holliday, co-founder of Norfolk, England-based brewery Moon Gazer Ale, which supplies pubs across the country with ales and craft lagers.
The Bank of England has warned that Britain is facing its longest recession on record a century ago.
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So far, Holliday said its business has “taken the hit,” absorbing increased production and energy costs to buffer customers. But if those price hikes are likely to continue through spring, he’ll have to pass those costs on.
“We’ve shared the pain with our customers, but that won’t be sustainable in six to 12 months,” Holliday said. This year alone, he estimates Moon Gazer Ale’s energy costs have increased by 25,000 to 30,000 pounds ($29,000 to $35,000) as costs have skyrocketed in Europe following the Russian invasion of Ukraine.
A percentage of the industry will say I’m stuck.
David Holiday
Co-Founder, Moon Gazer Ale
For many, however, a further rise in costs could be the death knell in a “three-year uphill battle” for an industry already maimed by Covid-19 restrictions, staff shortages and inflationary pressures.
“They’re kind of running out of battle,” Holliday said. “A percentage of the industry will say there’s no going on for me.”
Spending cuts, tax increases on the horizon
Entrepreneurs will now look ahead to the UK’s much-anticipated Autumn Statement on November 17, in which Treasury Secretary Jeremy Hunt announced 60 billion in spending cuts and tax hikes on public finances.
But many fear that the Treasury may go too far in its attempts to restore the UK’s economic standing – damaged by Liz Truss’ messy mini-budget – that it would spell further trouble for struggling industries and slow future economic growth .
“Because of Liz Truss and Kwasi Kwarteng, they’ve gone to the other extreme and they’re so cautious,” McKenzie said.
Early drafts of the government plan call for up to £35bn in spending cuts and around £25bn in tax hikes, according to the Guardian. Big tax hikes and spending cuts could put the UK at risk of a worse-than-expected “economic slowdown,” the BOE’s chief economist Huw Pill warned on Monday.
The UK Treasury said it would not comment on “speculation about tax changes” if contacted by CNBC.
“We fear they will go extreme to please investors. And if they don’t do something to protect the most vulnerable, they won’t get the growth,” McKenzie said, pointing to improved migration policies and a VAT rate cut as potential areas where the government could offer support.
And while some business owners like Banner-Price are confident they’ll pull through as consumers turn to fewer but higher-quality experiences and products, its fortunes, and those of many others, will depend on the broader business community’s ability to weather the storm.
“Even if we survive well, our guests still need to visit thriving local restaurants, cafes, tourist attractions, etc. You still need to be able to shop and visit the theater, take a cab and use all the other small businesses,” said Banner- Price said.