More than a million British small and medium-sized businesses are stockpiling raw materials and ordering components six months in advance to overcome a supply shortfall that prevents them from meeting customer demands.
As construction costs reached a new record high, and import prices rose after the pound fell, businesses reported that much of their cash was related to providing the basic raw materials and components needed to supply customers.
Simon Gray, ICAEW’s chief accountant, said the companies were suffering a “hat trick” that was forcing them to limit production.
“Businesses report that things are so bad that they cannot plan for the future. There is a breakdown in trust, and uncertainty changes their behavior, forcing them not to take risks and reduce investment. “
Business groups called on the prime minister to agree on a rescue plan to support companies affected by rising energy and fuel prices, wage inflation and rising prices for imported goods and raw materials.
Diesel prices in many areas have risen to above £ 2, increasing transport costs, while a 10% drop in the pound this year has led to higher import prices.
Brexit trade restrictions have also deterred firms from exporting to the EU and made it more difficult to import goods from the continent, according to a report last week. Resolution Foundation.
The manufacturer’s organization, Make UK, said its members are reporting extensive stockpiling to ensure increasingly scarce supplies from countries like China, and to protect against the prospect of even higher prices at the end of the year.
“Our recent reports have shown that investment funds and expansion plans are being postponed because more funds are being tied up to secure supplies,” said Fhahin Khan, a senior economist at the lobby group.
The warning came after the CBI reported a drop in private sector activity in the UK, which seems to justify concerns that the UK is heading for a recession in the autumn as high prices reduce cash incomes and restrain household spending.
The CBI said the slowdown was widespread in various sectors, with consumer services receiving the biggest hit (-41%), the sharpest drop in the sector since February 2021.
Looking ahead, it says that private sector activity is expected to decline over the next three months to -3%, where a negative figure indicates a reduction.
Alpes Palea, a leading CBI economist, said: “As recovery after a pandemic is severely hampered by persistently strong pressure on spending, private sector activity is shutting down.”
Gray said the firms placed orders for equipment and materials six months in advance to secure supplies, tying cash that would otherwise have been used for investment.
“Businesses order earlier, because if they don’t, they won’t have anything to sell in six months,” he said.
The Institute of Directors said companies cite the UK’s uncertain economic prospects as their number one concern and then the implications Brexitwhich severely hampered exports and imports from the continent.
Martin McTag, national chairman of the Small Business Federation, said consumers received aid but not businesses during cost of living crisis.
“It’s a really scary moment for many thousands of small businesses,” he said. “The price of a liter of petrol or diesel is just one very obvious example of the price pressure that small businesses are experiencing. But it’s not just fuel – it’s energy, raw materials, insurance, staff costs, rent, components – it’s all around.
Rishi Sunak said last month it will add £ 15 billion to its support package, including a £ 650 check for 8 million low-income families. But he rejected calls to offer the company additional subsidies.
According to the Bank of England, inflation reached 9.1% in May and is expected to approach even higher before reaching a high of around 11% in October.
The central bank raised the base rate to 1.25% earlier this month, the highest level since January 2009.
Interest rates should be raised “quickly and decisively” to prevent the strengthening of the inflation spike that has hit most countries in the world, according to the central body of the central bank, the Bank for International Settlements (BIS).
The Swiss-based BIS has supported a wave of rising interest rates in developed and emerging markets, and said plans for even higher borrowing costs for the rest of the year in response to inflationary pressures are very important.
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Speaking after his annual general meeting, where central bankers met to discuss their current difficulties and one of the most turbulent start of the year for global financial markets, BIS General Manager Augustine Carstens said: “The key for central banks is to act quickly and decisively. of how inflation will strengthen ”.
Carstens, the former head of Mexico’s central bank, said the focus would be on the coming months.
The BIS believes that an economic soft landing – if rates rise without causing a recession – is still possible, but acknowledged that it was a difficult situation.
“If this tightening leads to significant losses, to a significant correction of assets and it pollutes consumption, investment and employment – of course, this is a more complicated scenario.”
