Executive summary 2UK economic overview 3SME cost inflation trends 6SME cost base analysis 9SME credit conditions 10UK business insolvencies 11Contact 12Contents2This report was produced by Centrefor Economics and BusinessResearch (Cebr) for Aldermore.Cebr is not licensed in the conductof investment business as defined inthe Financial Services and MarketsAct 2000. Any client considering aspecific investment should consulttheir own broker or other investmentadviser. Any views on investmentsexpressed by Cebr, or on behalf ofCebr, are intended to be genericonly. Cebr accepts no liability for anyspecific investment decision whichmust be at the investor’s own risk.Whilst every effort has been made toensure the accuracy of the materialin this report, neither the authors norCebr will be liable for any loss ordamages incurred through the use ofthis report or associated materials.
• Annual cost inflationamong SMEs fell to 1.1%in Q1 2013, its lowest levelsince Q4 2009.• Business services SMEsfaced the lowest annualcost inflation, with nochange in total costs in Q12013 compared to a yearbefore.• Retail SMEs faced highercost inflation, at 1.0%.• Falling wages restraint anddeclining commercial rentshave helped curb costinflation in recent months.Executive Summary3Annual cost inflation for the average UK small and mediumsized enterprise (SME) continued to fall back in the firstquarter of 2013 to stand at 1.1%. This is down from 1.3% inthe previous quarter, and 2.0% in the same quarter a yearbefore.Of the sectors considered in this report, cost inflation washighest in the retail sector in Q1 2013. This reflected risinginput costs for food, tobacco, textiles and computer & electricalequipment. For other sectors, such as business services &finance, falling average total salaries on the back of a weakeconomic environment helped to bring down inflation.Despite falling cost inflation, the business environment forSMEs remains challenging. Insolvency levels are still muchhigher than before the financial crisis, with companyliquidations in Q1 2013 21.8% above that seen in Q4 2007.Access to credit also remains an issue, though there aretentative signs emerging that the Funding for Lending Scheme(FLS) from the Bank of England may be feeding through intolower borrowing costs.
UK economy flounders amid income squeeze and sluggishexport growth4• The UK economy grew by just 0.3% in 2012as a trade-led recovery proved elusive.Exports of goods and services contracted by0.2%, bearing down on economic expansion.• Growth is expected to remain just below the1% mark this year, as a slowdown inconsumer spending growth and economicweakness in our biggest export market – theEurozone – hold back prospects.• The consumer-side of the economy is beingheld back by extremely weak earningsgrowth which is trailing behind inflation. ONSaverage earnings data for the three monthsto February showed annual regular pay(excluding bonuses) growth of just 1.0% - thelowest growth rate since this data seriesbegan in 2001.• Structurally tighter access to credit, ongoingcompetitiveness issues and fiscal austerityall mean that the pace of UK economicexpansion will be weak over the comingyearsUK annual GDP growthSource: ONS, Cebr analysis-5%-4%-3%-2%-1%0%1%2%3%4%5%20002001200220032004200520062007200820092010201120122013Forecast
Decline in the price of oil helps curb some inputcosts, though sterling weakness partly offsets this5• Factory gate price inflation for manufacturedgoods slowed in the first quarter of2013, with annual price inflation standing at2.1% - down from 2.3% in Q4 2012.• The price of oil has fallen sharply in recentweeks. The price of Brent crude oil fell fromover $110 per barrel at the start of January toclose to $100 per barrel by mid-April.• Lower oil prices should place downwardpressure on input costs.• However, any decline in cost inflation will bemoderated by the depreciation in sterlingseen since the start of the year, which willplace upward pressure on import costs; on1st January 2013, a pound could buy $1.62;on 1st April it could purchase only $1.52.Sterling has also weakened against the euro.UK annual factory gate price inflationSource: ONS, Cebr analysis-2%0%2%4%6%8%10%2000Q42001Q42002Q42003Q42004Q42005Q42006Q42007Q42008Q42009Q42010Q42011Q42012Q42013Q4Forecast
SME business confidence picks up6• Business confidence picked up across allsizes of business in the first quarter of 2013.• Confidence among SMEs remained higherthan among large and very large businesses.Confidence among SMEs has been higherthan among larger businesses since the startof 2011.• Strong confidence among SMEs isparticularly important for the UK economy;these businesses employ more than half theworkers in the private sector and account forjust under half of private sector turnoverand, as such, are a key engine for growth inthe UK economy.Business Confidence by companyemployment sizeSource: ICAEW / Grant Thornton Business ConfidenceMonitor-15-10-5051015202530Q12010Q22010Q32010Q42010Q12011Q22011Q32011Q42011Q12012Q22012Q32012Q42012Q12013SMEs (0-249) Large (250+)Very Large (1000+)
Cost inflation falls back – partially driven by ongoing payrestraint and falling commercial rents7• Annual SME cost inflation stood at 1.1% inQ1 2013, down from 1.3% in the previousquarter and 2.0% at the same time a yearbefore.• This decline in the rate cost inflation thisquarter compared with Q4 2012 was drivenby slowing wage growth across theeconomy even falling total pay in thebusiness services & finance andconstruction sectors.• Commercial rents also continued to seeyear-on-year declines in Q1 2013, fallingannual decreases throughout 2012. This islikely to be partly driven by elevated officeand retail vacancy rates at present.• Gas prices remain an ongoing costpressure for businesses – particularly thosein the manufacturing sector for whom it isan important input into many productionprocesses. Prices were on average 12.6%higher than a year ago in Q1 2013.SME annual cost inflation rateSource: Cebr analysis-1%0%1%2%3%4%5%6%Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q12013
Costs for finance & business service firms drops back due tofalling total pay8• Of the sectors considered, cost inflation waslowest for business services firms in Q12013, at 0.0% over the past year.• Year-on-year average pay growth in thefinancial and business services sector wasestimated to be -1.0% in Q1 2013. Withemployment costs accounting for over half(roughly 54%) of total business servicescompany costs, pay restraint helped curbcost inflation in this sector.• At the other end of the scale, cost inflationwas highest in the retail sector in Q1 2013, at1.0%. This was mainly driven by the risingcost of physical business inputs, such as theproducts needed to stock retail outlets. Inparticular, the cost of manufactured foodproducts rose year on year by 3.5% in Q12013, placing upward pressure on the costsof supermarkets and other grocers.• Note that the chart opposite is of selected industriesonly and is not exhaustive of the entire SMEeconomy. The overall SME inflation index presentedon page 7 does, however, cover all business types.SME annual inflation rate by selectedindustrySource: Cebr analysis-6%-4%-2%0%2%4%6%8%Q42001Q42002Q42003Q42004Q42005Q42006Q42007Q42008Q42009Q42010Q42011Q42012Manufacturing ConstructionRetail Business Services
The cost of physical inputs is producing the greatest upwardpressure on business costs9• Of the 1.0% headline annual SME costinflation rate in Q1 2013, 0.3 percentagepoints were contributed by physical inputs.• The costs of manufactured products such asfoodstuffs and machinery & equipment(including computers) continued to rapidlyrise year on year in Q1 2013.• However, falling wage inflation has helped tobring down the overall rate. Thisquarter, employment costs contributed just0.1 percentage points to SMEinflation, down from 0.4 points the previousmonth.• At the other end of the scale, decliningrental costs helped contribute downwardpressure to SME cost inflation. Commercialrents in Q1 2013 were 0.3% lower than inthe same quarter a year ago.Contribution to headline annualSME inflation rateSource: Cebr analysis-0.05%0.00%0.05%0.10%0.15%0.20%0.25%0.30%0.35%0.40%
Employment costs and physical inputs make up the bulk ofaverage SME costs100%10%20%30%40%50%60%70%80%90%100%All SMEs Manufacturing Construction Retail BusinessServicesEmployment costs Physical Inputs Business services*Construction Transport & Storage Commercial rentEnergy & utilities Other services• Purchases of physical inputs and labourcosts are the largest costs forSMEs, accounting for some 20% and 30%of total businesses expenses for theaverage SME.• On top of this, a further 21% of total costsare spent on business services such aslegal & accounting, advertising, IT &telecommunications.• SMEs in manufacturing are heavilyweighted toward physical inputs – morethan 50% of total cost is on theseintermediate goods.• SMEs in retail have a strong transport andstorage weighting in their cost profile.• Meanwhile, over half of the costs forbusiness services SMEs are onemployment.Breakdown of business costs, % oftotal, by SME typeSource: Cebr analysis* inc: finance, legal & accounting, IT & telecoms
Tentative signs that FLS may be reducing business borrowingcosts11• Interest rates and spreads on newvariable-rate facilities to all small andmedium-sized enterprises (SMEs) havebeen broadly stable in recentmonths, according to survey data from theDepartment for Business, Innovation andSkills.• Some major UK lenders have reportedthat the Funding for Lending Scheme(FLS) had led to some downwardpressure on borrowing costs for smallerbusinesses.• However, the latest data continue to showthat the spread between the Bank ofEngland Bank Rate and median interestrates for SMEs – particularly smallerSMEs - is wider now than in mid 2009.Median interest rates on variable-ratefacilities and Bank of England BankRateSource: Bank of England, Department for Business, Innovation andSkills. Smaller SMEs are those with annual debit account turnover onthe main business account of less than £1 million. Medium SMEs arethose with annual debit account turnover on the main businessaccount of between £1 million and £25 million.0123456Nov-08Feb-09May-09Aug-09Nov-09Feb-10May-10Aug-10Nov-10Feb-11May-11Aug-11Nov-11Feb-12May-12Aug-12Nov-12Feb-13All SMEs Bank rateSmaller SMEs Medium SMEs
The number of business failures has been falling back12• There were 3,700 company liquidations inGreat Britain in Q1 2013. This is 20.2%below the same period a year ago.• However, reflecting ongoing weakness inthe UK economy, the level of liquidationsremains some 21.8% above that seen inQ4 2007• Business insolvency numbers are likely toremain elevated compared with before thefinancial crisis this year, reflectingcontinued weak economic conditions.• The recent decline in insolvencies wassurprising given the weak economicconditions that persisted throughout lastyear. It is quite possible that there are asignificant number of near-insolvent“zombie” companies at present, only ableto pay interest on debts (and not the debtitself). R3, the Association of BusinessRecovery Professionals, has estimatedthat there could be as many a 160,000such businesses in the UK.Total number of GB company liquidationsSource: Insolvency Service01,0002,0003,0004,0005,0006,000Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q12013
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