UK General Election: economy, economy, economy

Updated: 16 October 2023
Jonathan Andrew
Jonathan Andrew
Global Chief Executive

At the Labour Party Conference in 1996, Tony Blair outlined his key campaign message for the general election. “Ask me my three main priorities for Government, and I tell you: education, education, education.” The soundbite stuck, and the rest - as they say - is history.

With party conference season drawing to a close more than 27 years later, the (likely) 2024 general election will be won on a different word beginning with “e”.

In the week the IMF downgraded its forecast for the UK - predicting it to be the slowest growing developed country in 2024 - it’s easy to understand why the party able to convey its ability to return the UK to sunnier economic shores will be successful.

At the risk of heading down a well-trodden path, the UK’s woes today are abundant. Stubbornly-high inflation, interest rates to match, a productivity puzzle to solve, and an SME community calling for support. And this before considering a subdued housing market as a result of monetary policy leveraged to reduce the cost of living.

But while the economy should - and must – be at the heart of campaign efforts for the general election, there is work to do today to drive forward UK PLC for the final quarter of the year. And UK SMEs must be front and centre of this focus over the coming months, no more so than in the Chancellor’s Autumn Statement in November.

The asks of UK SMEs are consistently borne-out in our SME Confidence Tracker, which was this week featured in The Times. SME owners and decision makers say they want greater tax incentives, less red tape and access to low interest loans or grants.

The latter comes as more than two-thirds (67%) of SME owners and decision makers say they believe banks are less prepared to lend to them today. Furthermore, of those using external sources of funding, two-fifths (42%) say their financing availability has been reduced by lenders in the last six months during a time when almost half say their need for funding is greater than a year ago.

The Bank of England has itself highlighted lenders’ preference for financing larger and more established businesses, writing in its latest Agents’ Summary report: “Lenders remained cautious and concerned about the ability of businesses to repay borrowing, even in sectors where demand was relatively strong. They continued to favour lending to larger, well-established businesses, while small businesses reported that it was difficult to raise finance.”

So what does this mean?

In short, it reflects a turn in the credit cycle as traditional lending sources reappraise their credit appetite in expectation of higher defaults and impairments. Indeed, in August the Insolvency Service reported a 19% rise in business insolvencies year-on-year as businesses struggled with higher costs and falling sales. Our own research, conducted in September, paints a similar picture. Over the last six months, 48% of SMEs say at least one of their suppliers has become insolvent and 42% say the same is true for at least one of their customers.

Lenders’ caution to support only those with strong balance sheets and trading histories, therefore, could pose a wider risk to entrepreneurship in the UK. As a nation proud to provide a nurturing environment for new-starts and those willing to take risk in their pursuit of business growth, the implications of this commercial credit crunch could be long-lasting.

However, though traditional funding avenues may be temporarily roadblocked, gone are the days when banks need to be the first and only port of call for SMEs. In reality, more than ever, there are an abundance of alternative financing sources available to businesses if they are willing to look beyond bank loans and overdrafts.

In response to the publication of the latest World Economic Output, Sky News called for the IMF’s gloomy forecast for the UK to be taken with more than a pinch of salt. And, notwithstanding persistent challenges (and the instability of a general election), there are signs that 2024 could provide a more benign environment for business.

In the three months to December 2022, inflation stood at a towering 10.7%. Today it stands at 6.7% with the Bank of England predicting a further reduction to 5% by the year-end.

Interest rates, which were expected to peak at 6% remain at 5.75% with many predicting this to continue until the spring, before they begin to tumble slowly over the coming years.

Whatever the case, as the Government continues to work towards its target of halving inflation - predominantly via the Monetary Policy Committee - it must remain alert to the long-term knock-on effects on SMEs of higher borrowing costs and consider carefully policies that help to reduce the burden in the short-term.

Only with a strong entrepreneurial environment and a well-supported SME community will the UK economy return to sustainable economic growth. Whichever political party can articulate this ambition clearly will likely take the reins in 2024.