The Big Picture – Inflation and Interest Rates

Inflation is a measurement of how much more goods cost year on year expressed as a percentage. The current barometer of inflation is the Consumer Price Index (CPI) which looks at how much a basket of 700 items cost each month. In October 2021 inflation hit 5.1% which is the highest rate in just over a decade. Before October’s figures were announced, the Bank of England (BoE) hadn’t expected inflation to peak until April 2022 at 5%. This is despite a target of just 2%. There are some mitigating circumstances as to why the BoE has not been able to meet its own inflation target.

Mitigating Circumstances

Transport costs were by far the largest contributor to October’s 5.1% headline inflation. Oil production had not kept pace with increasing demand. Coupled with a shortage in tanker drivers, panic buying set in and some pumps ran dry. Second-hand car prices continued to suffer inflation as they have done throughout the pandemic. The global microchip shortage continues to limit new car production further pushing up used prices. Energy costs have reached unprecedented levels leaving a trail of liquidated energy firms, haunted by unsustainable wholesale costs. Brexit alone saw an exodus of working migrants and then a UK labour shortage. New import protocols caused a backlog of goods dockside. Supply chains for consumer goods, clothing and food continue to be interrupted. Most businesses have no option but to pass on the increased costs.

No business is immune from inflation. The cost of raw materials and the products they are turned into have become more expensive year on year. It’s not all attributable to Brexit either – the pandemic, global recession, sporadic recovery and market uncertainty means the cost of doing business is rising. At Advocate, we are seeing an increasing number of debtors sight supply chain costs as the primary reason for delaying payment. Debt collection agencies are seeing first-hand the impact of inflation as businesses struggle to pay their debts as and when they fall due.

Another Perfect Storm?

The credit crunch of 2007/08 saw America’s biggest lenders write down debt having sold high-risk mortgages to those who were barely able to afford them in the first place. Being part of a global economy, the credit crunch spread east and UK banks scrambled to sure up balance sheets. With less money being allocated for mortgages, house prices fell, negative equity became real for many and the rest as they say is history. It was the perfect storm. The UK now faces another set of circumstances that could set up another perfect storm but with different ingredients.

Although Britain has a thriving service industry, manufacturing is still very much at the heart of growth and prosperity. Make UK represents the manufacturing industry and has found a large percentage of its members are struggling to remain solvent. This is attributable to increased operating costs, reduced demand and the burden of pandemic debt. The pandemic has seen supply chains interrupted unlike anything seen in peacetime Britain. A survey by accounting firm RSM found that 48% of businesses were having trouble filling orders due to supply chain interruption. Earlier in 2021 Walkers attributed supply chain issues to some brands of crips being out of stock, likewise, McDonald’s ran out of ice cream, and Hill’s Pet Nutrition had to stop production of certain prescription foods due to a shortage of ingredients.

Lower Business Borrowing

Consistently low-interest rates in recent years have made businesses loans affordable. In 2020 at the height of the pandemic, business borrowing increased to £35.5 billion as firms took advantage of government-backed loans. Contrary to initial forecasting large British businesses are on track to borrow less in 2021 and pay back a large chunk of their liabilities. At Advocate, we are seeing some debtors prioritise loan repayments at the expense of creditors. This is why firms with seemingly excellent credit ratings are claiming cashflow difficulties. In reality, they are trying to strengthen the balance sheet with creditors seen as collateral damage when payments get delayed. Debt recovery in such situations is as achievable now as it has always been. Debtors are eager to preserve their cherished credit rating, and Advocate are eager to stop clients from being penalised through no fault of their own.

There is of course a caveat to note with businesses paying down their loans. It’s only larger businesses that have had the luxury of being able to strengthen their balance sheets this way. The reality for small and medium-sized businesses is an increase in borrowing by 26% in 2021 according to the BoE. You could try to correlate the ability of large businesses to pay down loans and delay supplier payments with the rise in small businesses taking out loans. However, this is sketchy at best. In some cases, supply chain inflation is as painful as late payment. Even if interest rates continue to rise from the record low of 0.1% to 0.25% in December 2021 and beyond, the cost of borrowing will still be less than it was in previous decades.

The Cost of Jobs

A recent poll in the Guardian has found 33% of small firms are looking to make redundancies in the first quarter of 2022. In London, that figure climbs to 40%. Businesses considering redundancies are looking to shed on average 45% of the workforce according to accountancy firm Moore UK. Nearly half of businesses expect to increase prices by the second quarter of 2022. Supply chain issues, lack of staff, reduced demand and inflation are being blamed for the bleak outlook. With additional Covid measures to control the Omicron variant, hospitality and city centre businesses reliant on commuter trade are facing an existential crisis. The unemployment rate was expected to increase when Furlough ended but the opposite has ensued. This in turn increases wages and makes it less viable to take staff on without passing on significant price rises.

Better than it Looks

This all sounds doom and gloom but the grit British businesses have shown throughout the pandemic gives more hope than the statistics suggest. Advocate has seen an increasing number of clients tighten their debt recovery procedures. In addition to reducing credit terms for customers and enforcing credit limits, clients are instructing Advocate sooner than in pre-pandemic times. It’s not uncommon for our debt collection process to start at a day overdue for debtors deemed high risk. Brexit, the pandemic and recession does have a silver lining. British businesses are becoming increasingly aware that instructing a firm such as Advocate empowers them, and that debt collection does not destroy customer relationships. More often than not the debtor will pay subsequent invoices on time. From our experience, it is clear debtors are becoming more appreciative of their creditors and the motives for escalating to a third party. Perhaps if the culture of debt recovery is starting to change. Advocate remains at the forefront of recovering your unpaid invoices on a no cost to you basis in accordance with current late payment legislation. Get in touch with us to see how we can help your business recover what it is owed without costing you a penny.