As the new year unfolds, many businesses will be anticipating another challenging period for the UK economy. However, while there are obstacles to navigate and uncertainties remain high, there is also cautious optimism that conditions could stabilise by the second half of the year. 

Rising global demand and energy supply constraints, due to the Russia-Ukraine war, led fuel prices to soar in 2022, and how this conflict unfolds represents perhaps the biggest influence on the outlook for the year ahead. The Energy Bill Relief Scheme for businesses expires at the end of March, and while news of further support is welcome, businesses should consider seriously their longer-term approaches to energy cost management.

Businesses may be able to temporarily mitigate some of the pressure by fixing their energy costs, or more longer-term by investing in more sustainable, energy-saving technologies and processes. Investments to improve energy efficiency are likely to represent one of the key differentiators for businesses looking to improve their competitiveness and support decarbonisation. 

Positively, there are growing signs that some of the other supply chain-related strains that hampered many firms from a pandemic recovery are subsiding. However, the unexpectedly abrupt end of China’s strict zero-Covid regime further highlights the ongoing risks to supply chains at a global level. Businesses that take steps to rebalance their supply chains towards greater resilience rather than simply cost and efficiency, stand to benefit should geopolitical fragility continue or worsen. 

A focus on delivering value

Businesses across the world are facing into the double threat of higher costs and declining demand. This backdrop is the likely base case for many UK businesses. Consumer spending looks set to come under sustained pressure as UK households’ purchasing power is eroded by high inflation. In December 2022, nearly  one in five (19%) 1 businesses reported a decrease in domestic demand compared with the previous calendar month. 

“The widely anticipated UK recession is yet to be confirmed, but sentiment indicators are signalling a broad slowdown as households and businesses respond to the headwinds facing the economy. As real household disposable incomes are squeezed by higher prices, consumers are likely to focus on necessities and reduce their discretionary spending,” says Jeavon Lolay, Head of Economic and Market Insight at Lloyds Bank. “If you’re in business, the ability to pass on higher input costs to customers will remain critical to your prospects.” 

How well a business is able to weather the storm will depend crucially on the financial health of its customers. A recent ONS survey  showed that 92% 2 of adults reported the cost of living as an important issue, with spending less on non-essentials and shopping around more, two of their most common responses. For businesses, a thorough understanding of your customers and products is crucial. This will support better decision making across a range of key parameters.

Higher costs: take the hit or pass them on?

Many businesses are currently having to either absorb higher costs or pass them on to customers. Some will have had to change suppliers following difficulties sourcing materials, and others which trade internationally, will have been affected by fluctuating exchange rates. 

Considering these issues, businesses have had to be nimble and resourceful, hedging risk and innovating to remain profitable. Marlow brewery Rebellion Beer, for example, has adopted a ‘radical localism’ strategy to reduce its fuel bill, become more sustainable and deliver a better quality product. Rather than scale up its production capacity, the business shrank its delivery area from a 70-mile to a 30-mile radius, saving 16,000 miles a year in transport costs and delivering fresher real ale to its local customers. 

Harnessing the power of data 

Not every business will have started 2023 on the back foot – plenty of companies are far from struggling. While a quarter of companies reported lower turnover in November 2022  compared with the previous month, 13% 3 reported their turnover was higher. Some sectors have seen continued robust demand.

Business and software services are doing particularly well, as digital transformation opportunities drive appetite for cost efficiencies in a range of areas. “Businesses are thinking about how they can increasingly digitise, and almost anything to do with data is doing well,” suggests Jeavon Lolay. For businesses to make better and faster decisions and stay ahead of the competition, they need to leverage their data to better understand their customers and make the most of potential opportunities. 

Labour market too tight not to mention

While the cost of living is impacting demand for many businesses, the continuing strength of the labour market and its implications for hiring, retention and wage costs represents another key challenge. 

However, there are already signs that the worsening economic outlook is bearing down on labour demand and also making employees more hesitant to change roles. While this will be welcome news for some sectors and businesses, the rude health of the labour market has represented a key pillar of support for household spending. Positively, the unemployment rate looks set to rise relatively modestly based on still high vacancy levels and firms' recent struggles to recruit.  

For the Bank of England, signs that labour demand and importantly wage growth are responding to the broader economic slowdown should temper the need for interest rate increases. While further rate hikes are expected, it is likely that the peak will be reached in the first half of 2023. That will be welcome news for many households and businesses. 

Prudent financial risk management 

Businesses face a wide range of financial risks. Financial risk management starts with identifying and assessing the risks involved and develops from your tolerance to accept or to mitigate them. A more uncertain business environment requires a more rigorous approach – it is certainly not business as usual. Harnessing specialist analytical tools and rigorous risk management techniques will help businesses better plan for an uncertain future. 

When it comes to the broader UK economic outlook, three key sources of macro financial risk dominated headlines in the past year – interest rates, foreign exchange, and commodity prices. With so many moving parts and known unknowns, the potential for more volatility in 2023 remains high. 

Sharpen the saw

Business owners will continue to watch macroeconomic events closely in 2023, including the path of inflation, interest rate decisions, and the next Budget. Any actions along these lines will have implications for Britain’s entrepreneurs, but they might be better off prioritising their focus on what they can control.

For your business to do well in 2023, understanding your customer will be more vital than ever. You cannot be all things to all people, so shape your offering to what your customer or target market needs most, focusing on your most profitable products and services. Risk management is crucial, so stress-test your key vulnerabilities and monitor what your peers are doing. “You don’t want to be too far on the edge taking chances that no-one else is, it’s therefore useful to know the risk appetite and attributes of your sector,” advises Jeavon Lolay. 

Although last year was remarkably tough for many of Britain’s businesses, they have once again proven their resilience. In 2023, the challenge remains as stern, but opportunities will emerge. Businesses that embrace and adapt to change, invest in themselves, and put the right risk management strategies in place, will be better placed to make the most of them.

Managing business costs and uncertainty

Managing business costs and uncertainty

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