We spoke to Nordens’ Director of Strategic Advisory, Joe Sword, on the current economic situation, both in the UK and globally, and what more can be done to help individuals and businesses in need…
Firstly, how do you see the current economic landscape in the UK?
The current economic situation is very tough, I think that is pretty clear. With so many factors at play, it is difficult for anyone to feel comfortable and stable. Recent government announcements and subsequent U-turns are only fuelling the fire of uncertainly. The UK market is not an attractive one at present as the UK is seen as a riskier investment. This has largely contributed to the fall in the pound and led to the bank taking emergency action.
Interest rates have only been low since around 2010. Before then they hovered around 5% between 2000 and 2010 and reached 17% in 1979. We are currently at 2.25% albeit these are expected to rise by at least a couple more percentage points, before starting to reduce again. Inflation was over 24% back in 1975, and nearly 18% back in 1980.
While it has been a long while since we have experienced inflation at such a high level it has happened before. Government debt as a percentage of GDP breached 200% during WWII, before reducing significantly over the preceding years. However, it is creeping back up quickly to the level we are currently at of nearly 100%. So while these statistics are not an attempt to downplay the tough situation we find ourselves in, it adds perspective. It also shows our economy has been in tough positions before and has recovered. History also shows that recessions tend to happen on average around 10-15 years.
What is vital is we have a strong committed government who communicate with clarity and have reasoning to back up their actions. We really need to see the governments complete plan to get inflation and national debt down to manageable levels. At the moment, we are getting announcements and promises. Ideally, I’d like to see more detail around how they have arrived at the decisions made and to back up them up. This will help reassure the people, and build confidence in them. In turn, it is likely to build confidence in the UK as a market externally.
What is the overall feeling when having conversations with clients about the situation at present and in the immediate future?
I think on the whole businesses and their owners are more resilient than ever, due to the trials of what they have faced during COVID. Certain industries are at a higher risk than others. Ideally, I’d like to see the government acknowledge and incorporate this more into their future planning and proposals. Communication in tough times is more important than ever, being there for your team and being clear with them is of paramount importance.
Look for areas you can restructure, streamline, improve, and automate. Trim anything or anyone that is not adding value. Critique your purchasing decisions, re-evaluate your pricing, negotiate, talk to your suppliers and customers. Training your team so it is set up to facilitate growth and pivot strategies is also key. All of these are all tools which successful businesses we have worked with are utilising.
Alongside all the positive actions, it is very important businesses owners have an outlet for them to talk. Whether this be a fellow owner, a family member, a friend, a coach or a mentor. Mental health is more than ever in the spotlight and you need to be able to vent, offload and tell your story. It can be a lonely place at the top of the tree with everyone looking to you for answers.
In a crisis there are often two sides to the coin, with troublesome times comes great opportunities. Many businesses took advantage of the opportunities that presented themselves during the initial outbreak of COVID. I feel many will do the same again now, but to make the most of the opportunities you need to be clear on what you want, with a plan of action to take you there. Knowing your numbers inside out is crucial. Also, financial modelling, with a best and a worst-case scenario is vital, as it restores confidence.
With the pound faltering to its worst market rate ever, should businesses be worried?
It is naturally going to affect more businesses than others. In particular those who rely on imports as they will buy less products if being billed in the overseas currency. It is important that businesses exposed to forex and adverse fluctuations have a hedging strategy in place to protect themselves. Even those who do not import directly will be affected as Britain imports so many of its goods and services. A weak pound means they are likely to cost more, with rising costs being passed onto consumers and fuelling inflation.
To counter the rising inflation, interest rates are likely to rise further. This means mortgages are going to me more expensive and higher repayments for some people. The falling pound will also give rise to increases in energy costs, as oil and gas that we use is priced based on the dollar. The government have introduced a price cap, but there are question marks about whether this is enough, particularly for businesses. The falling pound also means foreign travel, whether for business or for holidays will be more expensive.
The current economic situation, with the falling pound, means that purchases from the UK become more attractive. We may see an influx and boost to tourism industries and related businesses. Likewise, businesses who sell overseas could see a boost in sales, as it becomes cheaper to purchase from the UK. It is vital that businesses keep their fingers on the pulse here. Assess pricing, ensuring you are not selling yourselves short. Like everything it is about getting a balance. While businesses do not want to price themselves out of the market, they need to ensure they stay viable.
With energy prices capped for businesses for just another 6 months, rather than 2 years for households, is this enough to breed confidence throughout industries?
I think it is a starting point, and some immediate relief to reduce the panic that was building. So I would say it is a good start, although people and businesses should read the fine print and double check with their energy suppliers. I think the government were cautious about capping any further for businesses. This was so they could formulate predictions of how these measures are likely to hamper our longer-term economy. I think this is sensible enough, although 6 months will come and go quickly. Panic may start to rebuild, in the absence of further announcements.
Transparency is key, and if the government keep their cards too close to their chest for too long, confidence will fall further. More panic will ensue, and the UK will be seen as even more risky. Clear and detailed communication regarding support is needed and I believe this will come sooner rather than later.
Do you see this as a largely global situation, as stated by the current PM, or has the UK government been largely responsible for the economic turmoil in relation to the recent Mini-Budget?
I think the current economic situation definitely a global situation. You only need to look at recent economic outlooks published to see the size and scale of the recovery effort needed across the globe. Many other developed nations have seen similar trends of rising inflation and interest rates.
This was always likely to be the case given something as widespread as the pandemic, coupled with a devastating war. Recovery efforts from both are likely to take a significant amount of time. In the UK we also have Brexit, which has seriously affected many sectors in logistics and costs. In my view, the announcements in the Mini-Budget were perhaps knee jerk and could have been better thought through in timing and substance. To put the blame for the current economic situation solely at the hands of the Mini-Budget isn’t fair. It definitely hasn’t helped the state of the UK in the short term, which the markets have testified.
As a nation I really believe we need to reduce reliance. We are far too reliant on other countries and other overseas companies. There will always be an element of reliance, but there are certain things we can do to reduce that. A lot of that comes from being more sustainable and environmentally aware as a nation, and we need to see this promoted, rewarded, and incentivised. If we are able to become a cleaner energy nation and set up things to develop conserve and maintain our own energy, we will be a stronger nation and our economy will be better for it.
Aside from environmental issues, I feel too many of our strong companies and people are being snapped up by overseas buyers. We need to double down on rewarding innovation, expertise, and positive actions. This will ensure that people and businesses want to remain and thrive in the UK for the right reasons.
We can help
It is a long road ahead for the current economic situation with tough times likely to last well into 2023. Right now, it is important for business owners to speak up, and look to take informed action which comes from having a clear plan of where they want to be. At Nordens, we can help you through this every step of the way with a dedicated and award-winning Strategic Advisory team. We will identify the key areas of focus and improvement in your business, supporting your growth and future success. If this sounds of interest, then we would love to hear from you.
We hope this has outlined to you the current national and global situation economically. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.