Funding: Waves created by the perfect storm
September’s dip in inflation did little to ease the concerns being felt by many business leaders about the storm they see looming on the horizon.
The fall, to 3.1 per cent from 3.2 per cent the previous month, has been described as a “temporary data distortion” by Suren Thiru, head of economics at the British Chambers of Commerce.
He warns: “A renewed inflationary surge is expected in the coming months with the increase in the energy price cap, partial reversal of the VAT reductions for hospitality and tourism and persistent supply chain disruption.”
And his forecast is that this is likely to push inflation above four per cent by the end of the year.
If that is the case, the impact will be felt by Lancashire businesses in all sectors and could influence their plans when it comes to funding and investment.
The danger is clear. Suren spells it out, saying: “Rising inflation could disrupt UK’s economic recovery by eroding consumers’ spending power and squeezing firms profit margins and ability to invest.”
The September inflation rate is also used to determine the increase to business rates, with reports they could rise by around £1bn next April – another barrier to investment.
The UK is facing significant problems because we are too reliant on the state
Suren said: “Despite enduring the deepest recession on record, businesses are now facing a punishing rise in business rates in the next financial year because of soaring inflation.”
For manufacturers the rising cost of goods and raw materials remains a major challenge, with the erosion of profit margins again putting question marks against investment in property, plant and machinery for some.
The cost of borrowing, should the Bank of England increase its base rate in response to the inflationary pressures, would also rise.
Addressing that possibility, Suren says: “While inflation is uncomfortably high, the Bank of England must hold its nerve on interest rates.
“Raising rates at a time of escalating cost pressures and looming tax rises would severely undermine an already fragile recovery.”
Phil Richardson, managing director of Centaur Technologies in Leyland, explains how the specialist roofing company is being impacted by the rising price of steel.
He says: “As we are about to move into manufacturing, where most of the plant and machinery will be constructed of steel, the continued increase in prices has made it extremely difficult to pin down the end price for certain items.
“What we are quoted one week is now changing with updates almost weekly. So, in effect we have a price for a vessel in week one and by the middle of week two it has risen by approximately two per cent. On a large ticket item this can run into thousands of pounds.
“However, it isn’t just steel prices that are increasing. All raw material prices are on an upward trajectory.”
He places the blame for this on the shutdown of production plants during the pandemic and the impact of Covid on the shipping industry, which has “artificially hiked” the cost of a single container by thousands of pounds, a cost passed to the consumer.
He says: “I believe that there is a further four per cent rise still to come through the pipeline before things settle down a little and the ships reposition enough to meet demand.
“Most of the factories have now reopened and are close to full capacity but are struggling to move their finished goods.”
The much-reported shortage of HGV drivers in the UK has only added to the challenges, however Phil is confident the shipping and transport problems will “slowly begin to unwind” over the coming months.
He adds: “Rising raw material prices will always have a direct impact on planned corporate spend.
“From an investment point of view, continually rising prices make it almost impossible to pin down the required capital expenditure to fund new projects.
“There is little a country or company can effectively do at this stage, as all these events are driven by the world economy. This situation will eventually self-mitigate when the natural balance is restored.”
Tony Attard, chief executive of Hapton-based specialist fabric product manufacturer Panaz, says of the current situation: “When the storm ends you get hit by waves from unexpected areas and you need to be prepared.
“We have been hit like most businesses from extreme shortage of raw materials and large increases in commodity prices raising raw material prices.
“Transport has become a major barrier to trade, with either global freight costs rising, again putting up raw material prices, or transport into Europe costs increasing due to increases in Brexit red tape.
“With government raising taxation, and staff shortages due to skill deficiencies, business is going through a perfect storm.”
He adds: “The UK is facing significant problems because we are too reliant on the state. We are moving back to the 70’s with big state overriding business, not understanding that business creates the wealth.
“If we are not careful, we are approaching ‘stagflation’ – with increases in inflation absorbing salary increases and stagnant growth due to low productivity and labour shortages with difficult access to overseas markets.”
Tony Grimshaw, director of Padiham-based housewares manufacturer What More, says: “The situation is aggravated by the multi-directional bombardment of problems. Covid, raw material price increases and power increases. These directly impact all manufacturers.
“Our customers have problems of their own. They too are affected by Covid and power prices, the other problem they have is getting products to the shelves of their stores.
“What More has been investing heavily in the total replacement of its production machinery. One of benefits of this exercise is that the new state-of-the-art machinery is far more energy efficient.
“Unfortunately, those benefits are neutralised by the severity of the power price increases. Raw material prices have almost doubled over the last 18 months.
“These are global problems. Our customers understand that, mainly because they are getting the same story from manufacturers all over the world.”
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