Pressure on UK businesses won’t ease any time soon

The British economy is facing a comforting fact: the number of businesses that closed their doors last year was the highest in three decades.

More than 25,000 companies declared themselves insolvent in 2023, a record number since 1993, according to government data released this week. With pandemic-related business support measures winding down, the damage caused by years of high debt and interest rates, soaring prices and a cost-of-living crisis is becoming more evident. Bankruptcies have spread from small businesses to large companies, analysts say.

Companies that still face relatively high costs, demands for higher wages, supply chain uncertainties and faltering consumer confidence are hoping for better economic times. Slower inflation, stronger growth and interest rate cuts are expected this year, but not anytime soon.

The Bank of England on Thursday kept interest rates at 5.25%, the highest since 2008, and at that level since August, after falling from just above zero in a series increases over a year and a half.

Policymakers said inflation had fallen, including wage growth and services inflation, but some indicators of persistence remained “elevated.” Two members of the nine-person rate-setting committee voted for a quarter-point rate increase, while another voted for the first time in favor of a rate cut.

There has been good news on inflation, “but we need to be more confident that inflation will return to the 2% target and stay there,” Andrew Bailey, the governor of the bank. “We’re not at the point yet where we can lower interest rates.”

Inflation in Britain has fallen significantly, from its peak above 11% at the end of 2022 to 4% in December. Some economists expect inflation to slow to 2 percent in the spring. But concerns about inflation remaining at low levels mean investors expect the Bank of England to cut interest rates more slowly than the US Federal Reserve and the European Central Bank.

The bank said it expected inflation to fall below its target in the second quarter before rising again in the second half of the year. The inflation rate would end the year around 2.7% and remain there until 2025, not returning to the target until the following year.

The bank forecasts that the economy will continue stagnation in the second and third quarters of 2023 until the end of the year. The economy would only grow by 0.25% in 2024, before accelerating slightly in 2025.

High interest rates continue to work their way through the economy. About 30 percent of the effect of past interest rate hikes has not yet been passed on to businesses and households, the central bank estimated. This means that businesses that take out loans will face higher financing costs, while households that need to refinance their mortgages will face higher monthly payments than a few years ago.

Rising interest rates were one reason for the higher-than-average number of profit warnings from state-owned companies, according to consultancy EY-Parthenon. Contract delays and cancellations, rising overhead costs and low consumer confidence were also factors to consider.

Last year, bankruptcies hit retail and hospitality businesses particularly hard, and 97% of these businesses were small businesses with a turnover of less than £1 million (1.27 million of dollars), PwC said.

Jeff Cansdale closed his fish and chip shop in Reading, a town west of London, last week after seven years in business. Initially, business wasn’t too bad during the pandemic because Cansdale offered takeout and was able to stay open, he said. The store, a traditional “chippy,” also served some specialties like vegan fish and poutine, the Canadian dish of fries, cheese curds and gravy.

But one government funded rebate intended to encourage people to eat out hurt their business. Mr. Cansdale recovered, Russia invaded Ukraine and the store’s core costs – fish, oil and energy – skyrocketed. As inflation squeezed household budgets, his regular customers came much less often and ordered less. Profits plunged and have not recovered.

“Over time the business became unprofitable,” Mr Cansdale said. “That meant I was starting to accumulate debt that the company wasn’t going to be able to pay off.”

Economists at Oxford Economics said the increase in bankruptcies in many advanced economies, including Canada and the United States, was largely the result of falling insolvency levels during the pandemic. But, they said in a research note this week, there was no “cause for panic” because most of the companies going bankrupt were small and their difficulties would therefore not lead to an increase in unemployment. or a risk to general financial stability.

There are still concerns. On Thursday, the UK government announced it was “reaffirming” its support for small businesses by updating information on support they could receive and establishing a business council to speak directly with government officials.

The owners of Fidget & Bob, a cafe and deli in Reading, are troubled by the number of businesses closing in the town. At least half a dozen delicatessens, bars and other hospitality venues have already closed their doors this year.

And it’s the small, mostly independent businesses that give the city its personality, he said. Shuet Han Tsui, co-owner of Fidget & Bob. “The Reading does not have enough of these places to be able to lose a handful” in such a short time.

Ms Han Tsui and her co-owner, Breege Brennan, said their business was doing well, but they were working to keep costs low. They have shortened their hours and are encouraging customers to order in advance. Even reducing the time it takes to place an order by 5 to 10 percent helps, Ms. Han Tsui said. To attract more customers, they are bringing in products that once supplied recently closed local stores.

“We just need to see 2024 and hope that 2025 will bring something brighter,” she said.