There has been much debate by economic commentators as to whether the recession has bottomed out and, if so, whether the recovery will be ‘V’, ‘U’ or ‘W’-shaped, i.e. will we come straight out of the recession as fast as we went in, stay at the bottom for some time before a recovery, or will we start to recover and then decline again before seeing sustained growth?
The thing is that, although there are plenty of green shoots around, there are also so many problems still on the horizon and therefore it is very difficult to predict; who knows which businesses will survive?
Looking at the SME sector, the current level of demand for products and services varies considerably in different markets. The food industry is proving to be particularly buoyant, especially for those supplying supermarkets. Last month, seasonal clothing and outdoor living products did well but restaurants and pubs have been particularly hard hit as people tend to go out less often (although increased prices seem to be offsetting some of the fall in profits). Manufacturing has been hit hard, especially those supplying the automotive sector, whilst the service sector, which has seen its worst time ever, is now showing some signs of recovery. The sales of big-ticket items, e.g. cars, furniture and large electrical goods, are still falling as people appear to be adopting a “make do and mend” mentality. And that in itself creates a demand for repairs – shoe repair chain Timpsons is apparently doing a roaring trade at the moment.
Despite the low demand, most SMEs are reporting that they are still more concerned with raising finance than any sales problems. Although bank lending to the SME sector rose in the 1st quarter of this year, a recent Bank of England report reveals that corporate lending fell as a whole from £9 million in April to £7.9 million in May. Banks have not passed the interest rate cuts onto their SME customers, although the gap between the base rate and the rates offered to SMEs are slowly narrowing. We have found that our clients are having to find other sorts of finance, and many more are reliant on savings and family support than ever before.
One particular factor helping SMEs at present is falling costs, with labour and rents being noticeably lower than they were a year ago. Many employees have been given the choice of redundancy or lower pay and we are seeing numerous tenants renegotiating leases to reduce their rental payments - the last thing a landlord wants is an empty property, especially as they now have to pay rates on it while receiving no income.
The increase in red tape and regulation has hit the SME sector particularly badly. European employment legislation is hitting hard and other Government regulators appear to be becoming far more aggressive in their approach to regulation as a whole.
As business is hard and money tight, we are noticing a considerable growth in disputes between directors or business partners. It is also a particularly bad time for a director or partner who wishes to retire when the value of the business is deflated and their shares worth far less than they once were.
On the positive side, confidence in the SME sector appears to be improving. The latest Monthly Business Survey from the Chambers of Commerce reports that 30% of companies believe turnover will increase by up to a quarter over the next 3 months, compared to just 22% who believed this a month ago.
As hard as it is to predict, we believe that a slow recovery will be seen towards the end of the year and escalate in 2010. However, it will certainly not be plain sailing for the SME sector as the knock-on effects of the recession are just beginning to bite. Many companies have struggled on as best they can, stocks are low, and insolvency practitioners are reporting that the number of company failures is rising and will continue to rise.
On the positive side, it appears that many new businesses are starting. The business networking site, LinkedIn, conducted a recent survey and nearly half of respondents said they were planning to use their redundancy money to start a new business. More competition or more niche players offering something no one else does? We’ll see.
As a small business ourselves we are interested in your views on what effect the recession is having, who will survive, what should the banks do to support us? Join in the debate via our blog.