Thriving middle market businesses present a headache for Bank of England
| Firms that say turnover is up this quarter | 53% |
| Firms that say profit is up this quarter | 54% |
| Firms that say their capital expenditure has increased this quarter | 56% |
| Firms that say their recruitment has increased this quarter | 54% |
| Firms that say they have increased pay this quarter | 55% |
New data released by leading audit, tax and consulting firm RSM UK shows that many middle market businesses are performing well, with sentiment and growth on the up. Whilst this is good news for business, it presents a problem for the Bank of England (BoE) as it grapples with inflationary pressures.
The RSM UK Middle Market Business Index (MMBI), a quarterly survey of 411 senior executives at middle market companies conducted from 5 – 25 July 2023, jumped to 146.5 in the current quarter (Q3), its highest level since the survey began in 2021.
The big jump in the proportion of firms increasing prices in Q3 (46% in Q2 to 55% in Q3) led to a surge in the proportion of firms saying their turnover and profits rose (43% to 53% and 42% to 54% respectively).
But whilst the proportion of firms saying they were having to pay more for their inputs fell (72% to 65%), the increase in the number of firms increasing their prices suggests inflation may fall only slowly.
What’s more, there was a major increase in the proportion of firms saying they were hiring more people (43% to 54%) and in the number of firms paying their people more money (44% to 55%). This could pour more cold water on any hopes that the labour market is about to materially ease.
Thomas Pugh, economist at RSM UK comments: ‘Our latest quarterly index reveals that many middle market businesses are in good shape. Much of the increases we are seeing in our index stem from an improvement in the ability of firms to pass on price increases to their customers, which is driving a significant increase in expectations around revenue and profits. While that doesn’t necessarily mean the underlying economy is booming as most economic data is adjusted for changes in prices, firms would be unable to raise prices unless underlying demand was strong. This suggests that the economy is likely to avoid falling into a recession, at least over the next six months.
‘But our latest MMBI data won’t be looked upon favourably by the BoE given the challenges they face. The Monetary Policy Committee (MPC) has emphasised that the labour market will be key to its decision to increase interest rates again, so higher pay growth suggests more rate hikes are coming down the track as the MPC may have to do more to suck demand out of the economy.
‘Overall, we think the UK economy will resemble a seesaw over the next year. On one end will be the recovery in households’ real incomes, driven by falling inflation and a robust labour market. On the other side will be the impact of the huge surge in interest rates that have happened over the last year and a half on households and businesses. Over the rest of this year, the positive side is likely to win out, meaning economic growth should improve in Q3 and Q4 after a moribund first half. But as we enter 2024 the negative impact of higher rates is likely to grow heavier. While we think the UK will avoid a recession, we’re expecting virtually no economic growth next year, meaning it wouldn’t take much to tip the balance in favour of a recession.’
RSM’s MMBI presents unique insight into the health of the middle market – the engine room for growth in the UK – whilst drawing on credible forward-looking indicators to deliver predictive economic insight over a six-month period. The latest full report will launch on 5 September and can be viewed here
