During 2022, a combination of soaring prices (especially energy prices) and income lagging behind pushed the economy into recession. The bad news is that, according to forecasts by KPMG, the recession is likely to last for the rest of 2023, with output falling by 1.9%.
So why are things so bad, and what’s it likely to mean for you and your business?
What’s Causing the Recession?
The main driving force of the recession, according to KPMG, is the squeeze on household income, caused by a combination of high inflation and rising interest rates. Much of the inflation has been driven by disruption caused by the war in Ukraine and sanctions against Russia, post- Brexit issues and the after-effects of the Covid lockdown. All this has significantly reduced the purchasing power of households, hitting both manufacturers and retailers.
In fact, most businesses have been hit by the recession. This is partly due to the reduction of consumer spending, but there are also more direct issues. Rising interest rates have made it harder to get credit, as well as paying it off, while businesses with high energy needs have been especially hard hit by price rises.
What’s Likely to Happen in 2023?
According to KPMG’s projections, many of these problems will grow worse this year, even though inflation is likely to reduce a little. They foresee the economy shrinking by 1.3% and household consumption by 3.4%. At the same time, the base interest rate could rise to as high as 4% by spring.
The labour market is also weak, with troubled businesses less likely to fill vacancies. This will not only push up unemployment but also give bargaining power to employers, rather than employees. While this might benefit companies in the short term, in the longer term it will depress income, widening the gap between wages and prices, therefore reducing consumer spending even further.
This is based on likely outcomes, but isn’t entirely certain, as KPMG admit. Their Chief Economist Yael Selfin points out that “The outlook could turn more positive, particularly if energy costs drop back to previous levels. However, risks are probably skewed to the downside”.
How Will This Affect You?
Obviously, all these factors are likely to affect you as a consumer, but they could also have an impact on your business. Beyond increased fuel and interest costs and difficulties with supply chains in a disrupted world, the squeeze on consumer spending will probably reduce your income. Even if your customers are other businesses, they may be in a weaker position to buy from you.
At the same time, problems for businesses are likely to result in an increasing amount of money outstanding. While it’s entirely possible to steer an enterprising business successfully through the troubled times, too many unpaid invoices could scupper you.
That’s why it’s essential to have effective credit control, with varying strategies for the “can’t pay” and “won’t pay” debtors. Give me a call to find out how I can help you stay on top of what’s owed to you.