Cost pressures put recovery at risk
British businesses’ ability to recover from the COVID-19 pandemic and drive sustainable growth in domestic and international markets is under severe threat from rising costs, new Santander research suggests.
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The Spring 2022 edition of the Santander Trade Barometer reveals that while business confidence in general is growing, a wide range of cost increases, from wage bills to shipping expenses, are causing acute pressures across all sectors of the UK economy.
The ongoing impact of the pandemic, as well as the conflict in Ukraine, means that businesses continue to face huge levels of uncertainty. Sanctions imposed on the Russian state and disruption to the supply of oil, other commodities and foodstuffs as a result of the crisis mean that inflationary pressures are almost certain to persist in the months ahead. Businesses will need to make extra effort to seek the right help in dealing with supply chain and logistical issues in the most cost-effective way possible.
Inflation threatens bottom lines
Prices have risen sharply in Britain and around the world over the past 12 months as demand has soared, and supply chain problems caused by the pandemic have disrupted global trade.
In the UK, annual inflation, as measured by the Consumer Price Index, has risen from 0.4% in February 2021 to 6.2% in February 2022. This is its highest level in three decades, with the Bank of England predicting further increases as the year progresses.
While the Trade Barometer shows businesses are optimistic about their overall prospects, 76% expect to expand between now and 2025. There is increasing concern about economic headwinds and their potential to derail growth.
Inflation is the second biggest worry for businesses in the year ahead. Nearly half (43%) say rising prices are expected to be a source of negative impact. Only the after-effects of the pandemic are creating more widespread concern (59%).
The Santander research also considers where cost pressures are being felt. Transportation costs (see below) are an issue for 44% of businesses, and for 48% of those businesses which already trade overseas. Meanwhile, increases in import and material costs are affecting 43%, a figure that rises to 62% in the manufacturing sector.
Rising energy costs are an issue for 42% of businesses, and 40% say higher wage bills are a major challenge. Indeed, 46% of businesses say their starting salaries have increased significantly in the past six months, largely as a result of a tightening labour market and a lack of workers entering the UK from overseas due to both the pandemic and Brexit.
Meanwhile, a string of recent Bank of England base rate increases is likely to push up the cost of raising finance. Indeed, 36% of businesses in this wave of the Trade Barometer say they rely on bank finance to raise money, by far the most common form of funding. Overall, there is growing concern about the impact of higher domestic interest rates. 26% of businesses now say rising rates will have a negative impact on their growth compared with just 17% who said the same six months ago.
International supply chain costs and pressures
Looking in more detail at logistical pressures, there has been an increase in the number of businesses who say rising transportation costs may restrict their ability to grow between now and 2025. In the Autumn 2021 Trade Barometer, the number was 51% but this has now risen to 58%. This issue is being felt especially acutely in sectors such as wholesale & retail (85%) and manufacturing (70%).
The price of shipping is not the only challenge. Some 58% of businesses say that supply chain issues mean it is taking longer than usual for the goods they produce to reach their destination, a state of affairs which will only be exacerbated by the ongoing crisis in Ukraine.
Problems around transportation are felt more keenly by businesses engaging in international trade. For these businesses, logistics (39%) is second only to bureaucracy (42%) in terms of the most significant challenges they face when operating in overseas markets.
Among businesses which complain about transportation issues, the most pressing concern (73%) is delays. But 65% say they are facing rising container costs and 56% complain of higher prices for air freight. In terms of specific overseas markets, shipping costs are currently the biggest challenge for UK businesses dealing with both China and the United States, for example.
Logistical issues, meanwhile, are a major barrier for businesses which don’t yet trade overseas. 38% say the costs associated with shipping goods have prevented them starting their international trade journey in the past three years.
Frances Haque, Chief Economist at Santander UK, said: “With cost pressures showing no sign of easing in the months ahead, businesses need to be proactive in seeking out the suppliers, partners and operational efficiencies that can ensure they weather the current storm.”
How we can help
Santander has a team of sector experts, who work with businesses to provide both financial and non-financial solutions tailored to businesses in their respective sectors. The team understand the different challenges that businesses in their sectors are facing and work with their own ecosystem of specialists to support businesses in overcoming these challenges. Our sector experts also work closely with our international specialists to enable us to help businesses with both their domestic and international growth. As well as our sector expertise, our relationship teams across the UK are able to assist businesses with a range of solutions to help realise their growth ambitions, whether that’s in the UK or in overseas markets. This wealth of expertise will soon be available all in one place via the upcoming Santander Navigator platform. The platform will bring together ecosystem providers, events, market insights and more, all digitised in one platform and tailored to specific businesses, sectors, and functions.
If you need any help, please contact us on: international@santander.co.uk
For more information, please read the full Trade Barometer report