QES Q4 2021: Recovery weakening as inflation worries soar
- 65% of Norfolk firms expect their prices to increase in the next three months and 78% of businesses cited inflation as a concern
- 1 in 4 (27%) Norfolk manufacturing firms were worried about rising interest rates, as concerns over rate hikes reach record high
- Just over half of Norfolk firms (47%) reported increased domestic sales in Q4, compared to 45% in Q3
- 13% of Norfolk firms reported increases in export sales orders, compared to 17% in Q3
The BCC’s Quarterly Economic Survey (QES) – the UK’s largest independent survey of business sentiment and a leading indicator of UK GDP growth – has shown the recovery stalled in the fourth quarter, with firms facing unprecedented inflationary pressures.
The survey of almost 5,500 firms, including those from Norfolk, showed that some indicators also revealed a continued stagnation in the proportion of firms reporting improved cashflow and increased investment. Inflation is the top issue for firms, while a rise in the interest rate was also a cause for concern for many.
Norfolk Business activity:
47% of respondents overall reported increased domestic sales in Q4, only a slight increase from 45% in Q3. 21% reported a decrease, an increase from 16% in Q3. Advance domestic orders slowed, with over a third of firms (36%) reporting a decrease.
In the Norfolk services sector, the balance of firms reporting increased domestic sales increased to +52% in Q4 from +45% in Q3, however sales orders dropped to +36% in Q4, from +48% in Q3.
In the Norfolk manufacturing sector, the balance of firms reporting increased domestic sales was +36% in Q4, down from +45% in Q3.
Prior to the surge in Omicron infections, hotels and catering had been most likely to report increased domestic sales (55%). This represented the beginning of a potential recovery as the sector was also the most likely to report decreased sales throughout the rest of the pandemic. 94% reported decreased sales and cash flow at the start of the pandemic in Q2 2020. Worryingly, a similar decline is now possible in the face of the Omicron variant and the implementation of Plan B which led to new restrictions for some.
Unprecedented Inflationary Pressures:
65% of Norfolk firms expect their prices to increase in the next three months, the highest on record. The percentage expecting an increase rises dramatically to 87% for production and manufacturing firms.
When asked whether firms were facing pressures to raise prices from the following factors, 100% of Norfolk manufacturers cited raw materials, 40% cited other overheads, 40% cited pay settlements, and 7% cited finance costs.
When asked what was more of a concern to their business than three months ago, 78% of firms overall cited inflation (compared to 60% in Q3 and 36% in Q4 2020), the highest on record. For production and manufacturing firms, this rises to 87%.
Concerns over higher interest rates rise sharply:
The percentage citing interest rates as a concern rose in the quarter. Nearly 1 in 5 firms (20%) reported interest rates as a concern, up from 19% in Q3.
The percentage mentioning interest rates as worry among manufacturers stood at 27% in Q4 and up from 22% in Q3.
Little recovery to Cash Flow:
For Norfolk firms overall, 33% reported an increase to cash flow, while 57% reported no change and only 9% reported a decrease.
Given these figures were reported before the full impact of Omicron and the introduction of Plan B, this metric is a cause for concern, as some firms are still struggling to recover from large scale losses incurred since the start of the pandemic.
Most Norfolk firms still not investing:
Investment in plant, machinery, or equipment remained weak in Q4, with 38% overall reporting an increase, while 52% reported no change, and 10% a decline.
Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said:
“Our latest survey suggests that UK’s economic recovery slowed in the final quarter of 2021 as mounting headwinds increasingly limited the key indicators of activity.
“The persistent weakness in cash flow is troubling because it leaves businesses more exposed to the economic impact of Omicron, rising inflation and potential further restrictions.
“The record rise in price pressures suggests that a substantial inflationary surge is likely in the coming months. Rising raw material costs, higher energy prices and the reversal of the VAT reduction for hospitality are likely to push inflation above 6% by April.
“The notable uptick in concerns over higher interest rates underscores the need for the Bank of England to proceed with caution on further rate rises to avoid undermining confidence and an already fragile recovery.
“The UK economy is starting 2022 facing some key challenges. The renewed reluctance among consumers to spend and staff shortages triggered by the Omicron variant and Plan B may mean that UK GDP falls in the near term, particularly if more restrictions are needed.
“Rising inflation is likely to weaken the UK’s growth prospects this year by eroding consumers’ spending power and squeezing firms' profit margins and ability to invest.”
Responding to the findings, Nova Fairbank, Chief Operating Officer for Norfolk Chambers said:
“The Chambers’ latest Quarterly Economic Survey paints a challenging picture for the UK economy as we start 2022.
“Many local businesses were facing a struggle to improve their cashflow and raise investment even before the Omicron variant surged and Plan B was imposed.
“Supply chain disruption is continuing to persist, inflation is soaring, and rising energy costs are presenting firms with a huge headache.
“With companies now having to grapple with the impact of Omicron and further changes to the rules on imports and exports of goods to the EU, there are significant hurdles for Norfolk businesses in the months ahead.”
Also commenting on the QES results, Director General of the British Chambers of Commerce, Shevaun Haviland, said:
“The Government has listened to our previous calls for support, and it must do all it can to steady the ship and steer the economy through these uncertain times. If the current restrictions persist or are tightened further then a more comprehensive support package that matches the scale of any new measures, will need to be put in place.
“The focus must be on creating the best possible environment for businesses to grow and thrive. By supporting firms, they can begin to generate wealth, create jobs and support communities.
“That is by far the best way to sustainably deliver the tax revenue the government needs to support public services and the wider economy.”