Small and medium-sized companies fight against ‘a hat-trick of hurt’ | manufacturing sector

Britain’s army of more than a million small and medium-sized businesses is stockpiling raw materials and ordering components six months in advance to overcome supply shortages that prevent them from meeting customer demands.

With construction costs hitting new all-time highs and import prices rising in the wake of the pound’s decline, businesses reported that much of their cash was tied up in sourcing the raw materials and building blocks needed to supply customers. .

Simon Gray, head of business at the accounting body ICAEW, said companies were suffering “a trifecta of damage” that was forcing them to limit production.

“Companies report that things are so bad they can’t plan ahead. There is a breakdown in trust and uncertainty is changing their behavior, making them not take risks and reduce investment”,

Business groups have urged the prime minister to agree on a rescue plan to support businesses hit by rising energy and fuel costs, wage inflation and rising prices of imported goods and raw materials.

Diesel prices have soared above £2 in many areas, driving up transport costs, while the pound’s 10% drop this year has pushed up import prices.

Brexit trade restrictions have also deterred companies from exporting to the EU and made it harder to import goods from the continent, according to a report by the Resolution Foundation last week.

The manufacturers’ organisation, Make UK, said its members reported widespread stockpiling to secure dwindling supplies from countries such as China and to hedge against the prospect of even higher prices later in the year.

“Our recent reports have found that investment cash and expansion plans are being shelved because more funds are tied up to secure supplies,” said the lobbyist’s senior economist Fhaheen Khan.

The warning came after the CBI reported a slump in UK private-sector activity that appeared to justify concerns that Britain is headed for an autumn recession as high prices squeeze disposable income and discourage household spending.

The CBI said the slowdown was widespread across sectors, with consumer services seeing the biggest hit (-41%), marking the steepest drop experienced by the sector since February 2021.

Looking ahead, he said private sector activity was expected to retreat over the next three months to -3%, where a negative figure indicates a contraction.

Alpesh Paleja, chief economist at the CBI, said: “With the post-pandemic recovery severely challenged by continued strong cost pressures, private sector activity is grinding to a halt.”

Gray said companies were ordering equipment and materials six months in advance to secure supplies, tying up cash that would otherwise be used for investment.

“Companies are ordering earlier because unless they do, they won’t have anything to sell in six months,” he said.

The Institute of Directors said companies cited the UK’s uncertain economic outlook as their top concern, followed by the fallout from Brexit, which had severely hampered exports and imports from the continent.

Martin McTague, national president of the Federation of Small Businesses, said consumers had been helped but not businesses during the cost-of-living crisis.

“This really feels like a scary time for thousands of small businesses,” he said. “The cost of a liter of gasoline or diesel is just one very obvious example of the price pressures small businesses are experiencing. But it is not just fuel, it is energy, raw materials, insurance, personnel costs, rentals, components, it is general”.

Rishi Sunak said last month that he would add £15bn to his support package, including a £650 check for 8m low-income households. But he rejected calls to offer more subsidies to companies.

Inflation hit 9.1% in May and is expected to rise further before peaking at around 11% in October, according to the Bank of England.

The central bank raised its base rate to 1.25% earlier this month, its highest level since January 2009.

Interest rates need to be raised “rapidly and decisively” to prevent the surge in inflation that plagues most countries around the world from taking hold, according to the central bank’s umbrella body, the Bank for International Settlements (BIS).

The Switzerland-based BIS backed the wave of interest rate hikes in developed countries and emerging markets and said plans for even higher borrowing costs through the rest of the year in response to inflationary pressures were essential.

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Speaking after its annual general meeting, where top central bankers gathered to discuss their current difficulties and one of the most turbulent starts to the year for global financial markets, BIS General Manager Agustin Carstens said: “The key to central banks is to act quickly and decisively before inflation takes hold.

Carstens, the former head of Mexico’s central bank, said the emphasis was to act in the coming months.

The BIS believes an economic soft landing, where rates rise without triggering recessions, is still possible, but accepted that it was a difficult situation.

“If this adjustment generates massive losses, it generates massive asset corrections and that contaminates consumption, investment and employment, of course that is a more difficult scenario.”

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