Business confidence reduces recession risk

More than half of medium sized businesses are confident about future growth and are performing well, defying inflationary pressures, reveals RSM Index

Sara White, Editor, Accountancy Daily

A quarterly survey of 411 senior executives at middle market companies jumped to 146.5 in the current quarter (Q3), its highest level since the survey began in 2021. However, growth continues to be muted and the impact of more than a year of interest rate hikes is taking time to feed through.

There was a big jump in the number of businesses increasing prices in Q3 to 55%, compared to 46% the Q2, led to a surge in the proportion of firms saying their turnover and profits rose, up to 53%.

But while supply chain pressures were only a concern for a third of respondents, the increase in the number of businesses increasing their prices suggests inflation may fall only slowly, found the latest RSM UK Middle Market Business Index.

On the recruitment side, over half of respondents were hiring more staff, while 55% said they were also hiking salaries.

Thomas Pugh, economist at RSM UK said: ‘Our latest quarterly index reveals that many middle market businesses are in good shape. Much of the increases we are seeing in our index stem from an improvement in the ability of firms to pass on price increases to their customers, which is driving a significant increase in expectations around revenue and profits.

‘While that doesn’t necessarily mean the underlying economy is booming as most economic data is adjusted for changes in prices, firms would be unable to raise prices unless underlying demand was strong. This suggests that the economy is likely to avoid falling into a recession, at least over the next six months.

‘But our latest data won’t be looked upon favourably by the Bank of England given the challenges they face. The monetary policy committee (MPC) has emphasised that the labour market will be key to its decision to increase interest rates again, so higher pay growth suggests more rate hikes are coming down the track as the MPC may have to do more to suck demand out of the economy.

‘Overall, we think the UK economy will resemble a seesaw over the next year. On one end will be the recovery in households’ real incomes, driven by falling inflation and a robust labour market. On the other side will be the impact of the huge surge in interest rates that have happened over the last year and a half on households and businesses.

‘Over the rest of this year, the positive side is likely to win out, meaning economic growth should improve in Q3 and Q4 after a moribund first half. But as we enter 2024 the negative impact of higher rates is likely to grow heavier. While we think the UK will avoid a recession, we’re expecting virtually no economic growth next year, meaning it wouldn’t take much to tip the balance in favour of a recession.’