In this article we are going to delve into what the key challenges and opportunities facing UK businesses are.
The typical economic cycle encompasses the recurring pattern of prosperity and recession within the economy. This usually consists of a period of expansion of economic growth, but then due to limited capacity there will be inflation. In response to this, central banks will then need to raise interest rates to cool the economy, and therefore bringing inflation back down to the desired level.
This time, it was different. The Covid-19 pandemic caused a massive economic contraction, with huge government spending then required to support the economy. The problem that then followed was supply chain disruptions, caused by geopolitical factors like Russia’s invasion of Ukraine and more recently the war between Israel and Hamas. The biggest impact this had in the UK was a spike in energy prices.
The added challenge of the escalating situation in the Suez Canal has added further supply chain problems for the UK economy. This route accounts for 12% - 15% of global trade , and the reroute round South Africa’s Cape of Good Hope, is adding significant costs to UK businesses to get their goods in the UK.
For UK businesses, this means that with such an uncertain backdrop it is extremely important for management to understand what goods they need, from whom, from where and why. Contingency plans and workarounds are now also crucial, alongside making sure the correct business insurance is in place.
All these factors have combined to reverse the trends towards globalisation and now government and companies are being forced to look closer to home to trusted partners for more resilient growth models. This can be a big opportunity for UK companies.
Challenges In The UK Economy
Staff
Staff shortages in the UK are a real issue currently, with 9.2 million people aged between 16 – 64 who are not in work and not seeking employment. That is 700,000 people higher than before the pandemic . Compared with other G7 countries, the UK is the only country whose workforce has actually shrunk since 2020.
Labour Costs
The cost of labour is also increasing, by April 2024 the minimum hourly pay will rise by 9.8% to £11.44 an hour – the sharpest increase since 2001. Since January, all food retailers have said that store staff with receive at least £12 per hour from April 2024.
Understandably some businesses are running out of ways to absorb higher wages and maintain their operating margins, given the other cost pressures, such as energy, that they are facing.
Looking Forward
Recent Gross Domestic Product (GDP) growth figures suggest the UK economy emerging from a shallow two quarter recession in the second half of 2024. January saw a monthly GDP increase of 0.2% on the back of increased high street and online spending. Furthermore, UK inflation is coming down, albeit slowly, towards the 2% target. That said, the Bank of England’s Monetary Policy Committee (MPC) voted on 20 March 2024 to maintain interest rates at 5.25% . MPC has stated it needs to see wage growth moderate first; it is coming down, but not fast enough and is still higher than inflation.
What Are The Opportunities?
Generative AI
It was just over a year ago that Open AI’s Chat GPT widely launched but Generative AI was not on many people’s agenda. Now the use of AI has come a long way in a short space of time. Companies need to consider how they can use AI in order to streamline their business and maximise growth and productivity. A recent Salesforce survey found that higher performing companies are more than twice as likely to use AI than underperformers, so the potential is clear.
The Transition To Net Zero
Small to medium sized companies are generally further behind larger enterprises in planning for the net zero transition. However, this is likely to change as larger customers and suppliers start to look to the carbon footprint of their supply chain. Furthermore, when tendering for government contracts they may deem it mandatory to have a net zero policy in place.
Conclusion
UK businesses are facing a wide range of challenges, including supply chain disruptions, geopolitical risks, political uncertainties, and rising costs. However, when we examine the overall economic landscape, there are positive signs:
Receding global recession fears:
The spectre of a global recession has diminished. Despite the challenges, economies are showing resilience.
Unemployment rates have not surged significantly, providing hope for recovery.
Inflation trends:
Inflation, which soared during the pandemic, is gradually easing. Central Banks’ targets are coming back into view.
Interest rate cuts are increasingly likely, aiming to support economic stability.
In Summary, while obstacles persist, there are promising indicators that point toward economic improvement. Businesses must adapt and navigate these complexities, but the horizon holds potential for recovery and growth.