As a proud partner of Investec UK, we thought it prudent to bring our members an analysis of their recent update on the current state of the British economy and what they expect to transpire in the coming months. In this article, we will explore the potential implications of developing labour market dynamics, interest rates, and exchange rates, for UK businesses.
All Together and Investec UK stress that the information in this article should not be considered financial advice. Please click here for disclaimer.
The State of Play
According to Investec’s experts, the UK labour market has been significantly affected in the aftermath of the Covid pandemic by a sustained shortage of workers. “A smaller share of the population is employed, or looking for work, than pre-Covid”, they explain, “and with fewer workers available to fill a higher number of jobs, the UK’s unemployment rate remains very low at around 3.8%.” The consequence of this is a marked increase in job switching and vacancies, which are tell-tale signs of an extremely competitive market for employers.
Businesses are therefore having to pay more to recruit and retain staff, an effect which has only been exacerbated by other economic factors, such as the startlingly high rate of inflation. “Workers are looking for pay increases to cope with higher prices”, Investec claim, “which means labour is becoming more and more expensive.” The private sector, ex-bonus wage growth figure of 7.6% supports that assertion and is something Investec believes will be of significant concern to the Bank of England because of its potential to add to a second round of inflation.
“Wage rises contribute to inflation not only by increasing firms’ costs”, they clarify, “but also by putting extra cash in consumers’ pockets…Our economists think the Bank of England will therefore raise interest rates to a peak of 5.75%, causing a three-quarter UK recession.” With the base interest rate already standing at 5%, this is certainly something to keep an eye on, and the Bank of England’s Monetary Policy Committee – which is responsible for setting interest rates – is set to convene once more on Thursday the 3rd of August 2023.
Should a recession materialise towards the end of the year as Investec expect, it is likely to have a negative effect on the strength of Sterling, which could cause further concern for many businesses. “Our forecasts are for GBPEUR to move lower to €1.10 by end-year, and GBPUSD to $1.23”, Investec reveal. “But we expect dollar strength to continue to unwind more broadly in the medium-term, meaning GBPUSD may have some room to move higher over 2024.”
For UK businesses, this labour market shift elicits a more competitive and costlier environment for talent acquisition and retention, and the upsurge in wages translates into increased operational costs. Simultaneously, the potential for higher interest rates further compounds these financial challenges, particularly for businesses with or considering debt, and fuels the likelihood of a recession later this year which would likely be to the detriment of the Pound. But it isn’t all doom and gloom, because opportunity beckons for some businesses in crisis, and all those who make it through – as pointed out by our recent podcast guest, Ella d’Amato – will be monumentally stronger for it.
Three Things to Consider
In the face of these challenges, it is imperative that businesses respond. With that in mind, here are some pointers to help navigate this shifting landscape to ensure your business is in a stronger position moving into 2024 when macroeconomic circumstances could ease:
1. Re-evaluate Recruitment and Retainment Strategies
To compete in the current labour market, you must reassess your recruitment strategies. Offering competitive wages is a starting point, but incorporating other benefits, upskilling opportunities, and promoting a positive work culture will play a significant role in attracting desirable employees and retaining current ones.
During one of our CEO Circles last year, former Boden CEO, Jill Easterbrook, strongly supported these strategies, citing additional benefits as one of the best ways to recruit and retain staff in a challenging economy. “One of the businesses I work with have offered their staff a week of the year to work from wherever they please”, she explained. “It hasn’t made much of a difference to productivity, but the impact on the individual and the team has been immense.”
For more ideas to manage demand for increased wages during tough economic circumstances, head to this article, where we share more of Jill’s advice.
2. Review Financial Planning
With the Bank of England expected to raise interest rates, it’s important to factor in these changes for financial planning. If your business is planning to take on more debt, now might be the time to reconsider and seek alternative funding strategies, or pivot towards profitability, to mitigate the potential rise in borrowing costs.
An alternative funding strategy you might consider here is a bridging round, which Nicola Thompson, the former CEO of MADE.com, shared with the All Together community earlier this year. “A business I work with has recently conducted a small round – a bridging round – to get them through the tough period ahead”, she explained. “They have kind of said, ‘We aren’t interested in growth at the moment; what we want is to prove we can get to a stable, profitable position on a much lower volume’. The idea is they can then begin a much bigger round in the future with the stable economics behind it.”
3. Consider Your Currency Strategy
Anticipated currency rate changes should be factored into financial forecasting. For businesses reliant on imports, strategies might need to be adjusted to buffer against potentially higher costs due to a weaker GBP. Conversely, for exporting businesses, the weaker Sterling could present an opportunity to gain a competitive edge in international markets.
For more information on this subject and what it means for your business, we recommend contacting a professional, like Investec’s very own FX experts, who you can find, here.
In conclusion, these economic shifts present both challenges and opportunities for UK businesses. By staying agile, closely monitoring these evolving economic conditions, and adapting strategies accordingly, businesses can not only survive but thrive in this changing landscape.
If you would like one-to-one advice from a leading UK CEO to help with any challenges facing your business, apply to All Together today for up to 5 hours of mentorship every year, pro bono.