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How could the present economic situation impact your business?

How could the present economic situation impact your business?

We were hoping to see an improvement in the consumer confidence index by now. However, it appears that frequent strikes and a constant stream of warnings about the increases in gas and electricity, along with interest rate rises has, not surprisingly, created more negativity.

Energy Price Increases

In April, Ofgem lifted the price cap by 54%. This meant that the average annual bill rose from £1,277 to £1,971. From £106 a month to £164, an increase of £15 a week. In October the price cap will be lifted again to an expected £3,554. This lifts the monthly figure to £296. In January it is expected to increase again to £4,650, households will see their bills increase from the original average of £106 a month to £388.

This time last year Europe was getting 90% of its gas from Russia, with the change in the supply chain the price of gas rocketed. Gas and electricity producers raised their prices so rapidly that many energy suppliers went out of business. Ofgem says raising the price cap will keep the suppliers in business.

Why is electricity increasing so much if the supply of gas has caused the problem? About a third of the UK’s electricity is generated by burning gas. The UK market is different from most countries in that a greater proportion of homes are heated with gas. These two factors combined increases the gas demand, forcing up prices for the electricity generation which is then passed on.

“The impact has been exacerbated by high electricity prices in Europe, where drought conditions have affected hydro power plants and unplanned outages have reduced French nuclear output,” Joanna Fic, senior vice president at Moody’s.

There is no short term solution to the energy price increases. The cost of goods and services will continue to rise as businesses struggle to incorporate the increases in their business models.

Organisations need to look at this cost line closely. Without changes the additional costs are coming straight out of the profit generated.

Impact of strikes.

The subject of strikes is a sensitive one that splits the nation. People should be paid a fair wage for the work that they do. Every industry has a different business model, costs, profits, investments and renumeration all differ. Every case of a workforce being called out to strike should have a different argument. It is unfortunate that the rhetoric is always the same, bosses get paid too much and the workforce is not paid enough.

Regardless of the reason behind strikes it causes businesses multiple problems, not just those business dealing with a striking workforce. Felixstowe businesses are forecasting £ millions of lost revenue because of an eight day strike.

In addition, rail strikes, transport strikes, barrister strikes, garbage strikes etc. mean that the media talk about pay increases of 8% - 12%. Employees in other sectors start to wonder why they are not receiving a similar pay award putting pressures on all our businesses.

This is unsettling and demotivating for employees and can impact on morale and ultimately efficiency.

Interest Rate Rises

There has traditionally been a direct inverse link between inflation and interest rates. When interest rates are low inflation tends to rise and when rates are high inflation tends to fall.

As such the bank of England put up the interest rates to try and stop inflation. There is a separate argument that the current inflation figures are generated by unique circumstances and the historic inverted model may not work. Regardless of this there is an impact on businesses from two directions.

The most obvious is that those businesses that have loans that are not on a fixed rate will incur additional costs. More significant is the reaction from the consumer.

Consumers with mortgages, loans, credit cards and other finance arrangements are all likely to have increased costs. Those hit with higher borrowing costs are also hit with the higher inflation plus the significant energy price increases. These consumers will hold back on spending plans, they will try to reduce their monthly outgoings to reduce debt, this will eventually roll out to impact on most businesses.

The consumer confidence index measures how people feel about their own situation for the year ahead. Whilst the index had crashed to -40 it had steadied through June and July. The latest set of circumstances saw the index drop to -44. The graphs below show the same index for other countries, you will see the same trends.

How could the present economic situation impact your business?

With consumers continuing to tighten their belts the demand for products and services will drop.

Joe Staton, Client Strategy Director for GFK said The Bank of England expects further price increases will push the UK economy into recession later this year. “Making ends meet has become a nightmare and the crisis of confidence will only worsen with the darkening days of autumn and the colder months of winter,”

Consumer confidence index UK

Consumer confidence index Germany

Consumer confidence index France

Consumer confidence index Ireland


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