Upload
aldermorebank
View
688
Download
0
Embed Size (px)
DESCRIPTION
SME Inflation Report produced by the Centre for Economics and Business for Aldermore Bank
Citation preview
Aldermore SME Cost Inflation Index
Q1 2013
2
Executive summary 2
UK economic overview 3
SME cost inflation trends 6
SME cost base analysis 9
SME credit conditions 10
UK business insolvencies 11
Contact 12
Contents
This report was produced by Centre for Economics and Business Research (Cebr) for Aldermore.
Cebr is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Any client considering a specific investment should consult their own broker or other investment adviser. Any views on investments expressed by Cebr, or on behalf of Cebr, are intended to be generic only. Cebr accepts no liability for any specific investment decision which must be at the investor’s own risk.
Whilst every effort has been made to ensure the accuracy of the material in this report, neither the authors nor Cebr will be liable for any loss or damages incurred through the use of this report or associated materials.
3
• Annual cost inflation among
SMEs fell to 1.1% in Q1
2013, its lowest level since
Q4 2009.
• Business services SMEs
faced the lowest annual cost
inflation, with no change in
total costs in Q1 2013
compared to a year before.
• Retail SMEs faced higher
cost inflation, at 1.0%.
• Falling wages restraint and
declining commercial rents
have helped curb cost
inflation in recent months.
Executive Summary
Annual cost inflation for the average UK small and medium sized enterprise (SME) continued to fall back in the first quarter of 2013 to stand at 1.1%. This is down from 1.3% in the previous quarter, and 2.0% in the same quarter a year before.
Of the sectors considered in this report, cost inflation was highest in the retail sector in Q1 2013. This reflected rising input costs for food, tobacco, textiles and computer & electrical equipment. For other sectors, such as business services & finance, falling average total salaries on the back of a weak economic environment helped to bring down inflation.
Despite falling cost inflation, the business environment for SMEs remains challenging. Insolvency levels are still much higher than before the financial crisis, with company liquidations in Q1 2013 21.8% above that seen in Q4 2007. Access to credit also remains an issue, though there are tentative signs emerging that the Funding for Lending Scheme (FLS) from the Bank of England may be feeding through into lower borrowing costs.
4
UK economy flounders amid income squeeze and sluggish export growth
• The UK economy grew by just 0.3% in 2012 as a trade-led recovery proved elusive. Exports of goods and services contracted by 0.2%, bearing down on economic expansion.
• Growth is expected to remain just below the 1% mark this year, as a slowdown in consumer spending growth and economic weakness in our biggest export market – the Eurozone – hold back prospects.
• The consumer-side of the economy is being held back by extremely weak earnings growth which is trailing behind inflation. ONS average earnings data for the three months to February showed annual regular pay (excluding bonuses) growth of just 1.0% - the lowest growth rate since this data series began in 2001.
• Structurally tighter access to credit, ongoing competitiveness issues and fiscal austerity all mean that the pace of UK economic expansion will be weak over the coming years
UK annual GDP growth
Source: ONS, Cebr analysis2
00
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
For
ecas
t
5
Decline in the price of oil helps curb some input costs, though sterling weakness partly offsets this
• Factory gate price inflation for manufactured goods slowed in the first quarter of 2013, with annual price inflation standing at 2.1% - down from 2.3% in Q4 2012.
• The price of oil has fallen sharply in recent weeks. The price of Brent crude oil fell from over $110 per barrel at the start of January to close to $100 per barrel by mid-April.
• Lower oil prices should place downward pressure on input costs.
• However, any decline in cost inflation will be moderated by the depreciation in sterling seen since the start of the year, which will place upward pressure on import costs; on 1st January 2013, a pound could buy $1.62; on 1st April it could purchase only $1.52. Sterling has also weakened against the euro.
UK annual factory gate price inflation
Source: ONS, Cebr analysis
20
00
Q4
20
01
Q3
20
02
Q2
20
03
Q1
20
03
Q4
20
04
Q3
20
05
Q2
20
06
Q1
20
06
Q4
20
07
Q3
20
08
Q2
20
09
Q1
20
09
Q4
20
10
Q3
20
11
Q2
20
12
Q1
20
12
Q4
20
13
Q3
-2%
0%
2%
4%
6%
8%
10%
For
ecas
t
6
SME business confidence picks up
• Business confidence picked up across all sizes of business in the first quarter of 2013.
• Confidence among SMEs remained higher than among large and very large businesses. Confidence among SMEs has been higher than among larger businesses since the start of 2011.
• Strong confidence among SMEs is particularly important for the UK economy; these businesses employ more than half the workers in the private sector and account for just under half of private sector turnover and, as such, are a key engine for growth in the UK economy.
Business Confidence by company employment size
Source: ICAEW / Grant Thornton Business Confidence Monitor
Q1
20
10
Q2
20
10
Q3
20
10
Q4
20
10
Q1
20
11
Q2
20
11
Q3
20
11
Q4
20
11
Q1
20
12
Q2
20
12
Q3
20
12
Q4
20
12
Q1
20
13
-15
-10
-5
0
5
10
15
20
25
30
SMEs (0-249) Large (250+)Very Large (1000+)
7
Cost inflation falls back – partially driven by ongoing pay restraint and falling commercial rents
• Annual SME cost inflation stood at 1.1% in Q1 2013, down from 1.3% in the previous quarter and 2.0% at the same time a year before.
• This decline in the rate cost inflation this quarter compared with Q4 2012 was driven by slowing wage growth across the economy even falling total pay in the business services & finance and construction sectors.
• Commercial rents also continued to see year-on-year declines in Q1 2013, falling annual decreases throughout 2012. This is likely to be partly driven by elevated office and retail vacancy rates at present.
• Gas prices remain an ongoing cost pressure for businesses – particularly those in the manufacturing sector for whom it is an important input into many production processes. Prices were on average 12.6% higher than a year ago in Q1 2013.
SME annual cost inflation rate
Source: Cebr analysis
Q1
20
02
Q4
20
02
Q3
20
03
Q2
20
04
Q1
20
05
Q4
20
05
Q3
20
06
Q2
20
07
Q1
20
08
Q4
20
08
Q3
20
09
Q2
20
10
Q1
20
11
Q4
20
11
Q3
20
12
-1%
0%
1%
2%
3%
4%
5%
6%
8
Costs for finance & business service firms drops back due to falling total pay
• Of the sectors considered, cost inflation was lowest for business services firms in Q1 2013, at 0.0% over the past year.
• Year-on-year average pay growth in the financial and business services sector was estimated to be -1.0% in Q1 2013. With employment costs accounting for over half (roughly 54%) of total business services company costs, pay restraint helped curb cost inflation in this sector.
• At the other end of the scale, cost inflation was highest in the retail sector in Q1 2013, at 1.0%. This was mainly driven by the rising cost of physical business inputs, such as the products needed to stock retail outlets. In particular, the cost of manufactured food products rose year on year by 3.5% in Q1 2013, placing upward pressure on the costs of supermarkets and other grocers.
• Note that the chart opposite is of selected industries only and is not exhaustive of the entire SME economy. The overall SME inflation index presented on page 7 does, however, cover all business types.
SME annual inflation rate by selected industry
Source: Cebr analysis
Q4
2001
Q3
2002
Q2
2003
Q1
2004
Q4
2004
Q3
2005
Q2
2006
Q1
2007
Q4
2007
Q3
2008
Q2
2009
Q1
2010
Q4
2010
Q3
2011
Q2
2012
Q1
2013
-6%
-4%
-2%
0%
2%
4%
6%
8%
Manufacturing Construction RetailBusiness Services
9
The cost of physical inputs is producing the greatest upward pressure on business costs
• Of the 1.0% headline annual SME cost inflation rate in Q1 2013, 0.3 percentage points were contributed by physical inputs.
• The costs of manufactured products such as foodstuffs and machinery & equipment (including computers) continued to rapidly rise year on year in Q1 2013.
• However, falling wage inflation has helped to bring down the overall rate. This quarter, employment costs contributed just 0.1 percentage points to SME inflation, down from 0.4 points the previous month.
• At the other end of the scale, declining rental costs helped contribute downward pressure to SME cost inflation. Commercial rents in Q1 2013 were 0.3% lower than in the same quarter a year ago.
Contribution to headline annual SME inflation rate
Source: Cebr analysis
-0.05%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
10
Employment costs and physical inputs make up the bulk of average SME costs
All SMEs Manufactur-ing
Construction Retail Business Services
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Employment costs Physical Inputs Business services* Construction
Transport & Storage Commercial rent Energy & utilities Other services
• Purchases of physical inputs and labour costs are the largest costs for SMEs, accounting for some 20% and 30% of total businesses expenses for the average SME.
• On top of this, a further 21% of total costs are spent on business services such as legal & accounting, advertising, IT & telecommunications.
• SMEs in manufacturing are heavily weighted toward physical inputs – more than 50% of total cost is on these intermediate goods.
• SMEs in retail have a strong transport and storage weighting in their cost profile.
• Meanwhile, over half of the costs for business services SMEs are on employment.
Breakdown of business costs, % of total, by SME type
Source: Cebr analysis
* inc: finance, legal & accounting, IT & telecoms
11
Tentative signs that FLS may be reducing business borrowing costs
• Interest rates and spreads on new variable-rate facilities to all small and medium-sized enterprises (SMEs) have been broadly stable in recent months, according to survey data from the Department for Business, Innovation and Skills.
• Some major UK lenders have reported that the Funding for Lending Scheme (FLS) had led to some downward pressure on borrowing costs for smaller businesses.
• However, the latest data continue to show that the spread between the Bank of England Bank Rate and median interest rates for SMEs – particularly smaller SMEs - is wider now than in mid 2009.
Median interest rates on variable-rate facilities and Bank of England Bank Rate
Source: Bank of England, Department for Business, Innovation and Skills. Smaller SMEs are those with annual debit account turnover on the main business account of less than £1 million. Medium SMEs are those with annual debit account turnover on the main business account of between £1 million and £25 million.
Nov
-08
Feb
-09
May
-09
Aug
-09
Nov
-09
Feb
-10
May
-10
Aug
-10
Nov
-10
Feb
-11
May
-11
Aug
-11
Nov
-11
Feb
-12
May
-12
Aug
-12
Nov
-12
Feb
-13
0
1
2
3
4
5
6
All SMEs Bank rateSmaller SMEs Medium SMEs
12
The number of business failures has been falling back
• There were 3,700 company liquidations in Great Britain in Q1 2013. This is 20.2% below the same period a year ago.
• However, reflecting ongoing weakness in the UK economy, the level of liquidations remains some 21.8% above that seen in Q4 2007
• Business insolvency numbers are likely to remain elevated compared with before the financial crisis this year, reflecting continued weak economic conditions.
• The recent decline in insolvencies was surprising given the weak economic conditions that persisted throughout last year. It is quite possible that there are a significant number of near-insolvent “zombie” companies at present, only able to pay interest on debts (and not the debt itself). R3, the Association of Business Recovery Professionals, has estimated that there could be as many a 160,000 such businesses in the UK.
Total number of GB company liquidations
Source: Insolvency Service
Q1
2004
Q3
2004
Q1
2005
Q3
2005
Q1
2006
Q3
2006
Q1
2007
Q3
2007
Q1
2008
Q3
2008
Q1
2009
Q3
2009
Q1
2010
Q3
2010
Q1
2011
Q3
2011
Q1
2012
Q3
2012
Q1
2013
0
1,000
2,000
3,000
4,000
5,000
6,000
13
• For any questions or comments on this report please contact Holly Marshall, Head of Corporate Affairs, Aldermore
• [email protected]• www.aldermore.co.uk
Contact