Annual cost inflation among UK SMEs increases to 1.1%
Aldermore Bank’s SME Monitor published today shows a positive picture for UK SMEs and employees alike as the economy continues to improve.
UK SMEs have seen a 1.1% increase in annual cost inflation in the first quarter of 2014, according to the research compiled for Aldermore by the Centre for Economics and Business Research. This increase was largely driven by rising wages, which are up 1.9% year-on-year, contributing 56% to the overall SME inflation rate.
While wages among SMEs are up 1.9% year-on-year, wage growth remains subdued by historical standards. Moreover, wage growth has been very diverse across different industry sectors, and was especially strong for some sectors such as construction, which saw an increase of 2.9%, likely driven by skills shortages in the sector. Wage growth was more subdued for the manufacturing sector at 1.9%, while wages actually recorded a fall of 0.4% in the business services sector.
The rise in overall SME wage costs has been offset by falling product costs, with the price of materials including metals and chemicals declining by 0.8% in the first quarter. This is the biggest reduction since Q4 2001 and is due to the declining demand for commodities from emerging markets.
SMEs have also enjoyed a 3.3% reduction in the cost of financial services. This, together with the fall in the cost of physical inputs, has ensured that despite rising wages, the overall cost inflation increase has been moderate.
The UK economy grew by 0.8% in Q1 2014, leaving the country just shy of the pre-crisis peak in Q1 2008. The report states expectations of UK economic growth of 3% over 2014 as a whole. If this prediction is correct, the UK could become the fastest growing economy in the G7 this year. With this backdrop, business confidence has more than doubled amongst SMEs since Q1 2013, reaching +39.8 in Q1 2014. Confidence amongst larger firms also grew steadily but still lags behind that of SMEs.
Aldermore deputy chief executive and group commercial director Mark Stephens said: “Despite a marginal rise in cost inflation, Aldermore’s SME Monitor paints a positive picture for SMEs in Q1 2014. Confidence is up across the board and SMEs are showing particular optimism. Wages are up, which is fantastic news for employees, and the cost of commodities is down. 2014 looks set to be a strong growth year for the UK economy and UK businesses.
“However, the data suggests we are not out of the woods yet. Business insolvencies are still well above pre-2008 levels, with just over 4,000 firms having been liquidated in the first quarter of 2014. With many commentators suggesting that the Bank of England is preparing to increase interest rates we also expect to see a tougher climate for SMEs in 2015.”
Danae Kyriakopoulou, economist at the Centre for Economics and Business Research said: “Cost pressures for UK SMEs remained benign this quarter, supporting the continuous overall improvement in business conditions we’ve seen in the UK since 2013. A slowdown in emerging markets has kept commodity prices subdued, curbing costs to UK businesses. Wage costs on the other hand have started picking up, but remain modest. Sectors such as construction are starting to see faster wage growth as skills shortages place upward pressure on pay.”
“However, businesses will need to prepare for challenges ahead. The Bank of England is likely to start raising interest rates by early next year. And an escalation of current geopolitical tensions in the Middle East and Ukraine could also push up energy costs, toughening the climate for UK SMEs.”
