UK SMEs feel squeezed after months of double-digit sales growth

Is the party over before it even started? Data released this week suggests that following a wave of post-pandemic optimism, Britain’s small and medium-sized enterprises (SMEs) are seeing sales contract as wages rise. Put simply, it sounds difficult – especially when you look beyond the heady world of venture capital tech companies and consider the wider SME economy.

In truth, the headwinds have been gathering for some time. At first glance, the UK economy emerged from the worst months of the pandemic looking quite robust. Growth has returned quickly and – as the government does not tire of pointing out – the unemployment rate is, in historical terms, very low, around 3.8%.

But it is becoming increasingly clear that the low unemployment figures are only partly due to job creation. There are currently more than a million vacancies in the UK economy, a figure that indicates a severe labor shortage. As is the case elsewhere in Europe and the United States, the so-called Great Resignation plays a part in this, but in Britain it has been exacerbated by the Government’s taking a hard line on European immigration following Brexit. All of this has put upward pressure on wages at a time when other costs are also rising.

And if a survey published by the accounting platform, Xero in collaboration with Accenture Believe it, demand is starting to come under pressure.

The good news is that, overall, small business sales continue to grow. The bad news is that growth has slowed markedly. After 13 months of double-digit growth, the new data suggests the average is now 6.3%.

But even that number is misleading. In the retail sector, SMEs saw their sales fall by 4.8%, proof that in the face of the evening headlines about unaffordable energy prices and (as the Governor of the Bank of England) an upcoming food price “apocalypse” due to the war in Ukraine, consumers are cutting back on discretionary spending.

Good and bad news

There was better news in the manufacturing sector where sales rose 6.4% and construction also kept its head (just) above water with growth of 3%.

So, one could argue that when looking at the big picture, SMEs are not doing too badly. Yes, growth is slowing, but for the most part we don’t expect contraction.

But the elephant in the room is the salary.

The survey reveals – and this is in line with government figures – that wages for SMEs rose by 4.4% in April compared to the same month a year earlier. This is where things start to look dangerous. In an economy with a million vacancies, SMEs have to pay more to attract staff at a time when they can ill afford it.

And the longer-term problem is that wage pressure is expected to increase further. With inflation at 9.0%, the standard of living is falling. In theory at least, workers will want higher settlements to keep up.

This, in turn, will likely prompt the Bank of England to raise interest rates further, which will increase the cost of borrowing. This will not only dampen consumer spending, but also make it more difficult for companies looking to raise debt capital.

A perfect storm

In other words, we are witnessing a perfect storm for SMEs. And with payment delays also on the rise, Xero’s managing director for UK and EMEA, Alex von Schirmeister, says many big companies aren’t helping matters. “It’s a harbinger of what’s to come,” he said. “Small businesses are being hammered by a slowdown in consumer spending and a slowdown in paying what is owed to them. Late payments should be classified as “unapproved debts”. Small businesses are being pushed over the edge by big corporations clinging to their suppliers’ money. Even a single unpaid invoice can set off a chain reaction that leads to delays, instability, and disastrous consequences across entire supply chains.

When – like me – you write a lot about tech companies backed by venture capital, it’s easy to get carried away with a narrative suggesting that the pandemic has accelerated the growth of digital platforms and thus improved the prospects for companies in the innovation economy. But that’s not a narrative that the majority of SMEs can necessarily subscribe to. Nor can any business escape the impact of falling demand and rising wages.