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Latest economic updates

General Economic Outlook:  

The Midlands Engine reports that businesses are still faced with increasing costs from energy prices, talent and labour shortages, supply chain disruption, VAT for hospitality returning to 20% and rampant inflation with key sectors still needing time recover from 2 years of COVID-19 pandemic:

Key issues

  • The rising cost of living and increasing inflation is causing concern and may lead to severe impacts. Raw materials and energy are impacted and may start to make some businesses unsustainable. This is due to an often-limited ability to pass on costs to consumers. This could dent confidence in businesses and make them ever more cautious, deferring decisions, and delaying possible investments.
  • Energy prices continue to put significant pressure on SMEs, especially those in the manufacturing sector that have significant energy usage.
  • Businesses have told the region’s Growth Hubs that the proportion of expenditure on energy bills is resulting in negative adjustments to business growth projections over the next few years.
  • SMEs consulted recently stated that cashflow is coming under pressure, with some organisations spending 20% of their revenue on energy costs.
  • The increase in wholesale energy has however driven a number of businesses to explore and adopt energy efficiency measures in an effort to curb expenditure on their energy bills.
  • Many businesses are also still reporting supply issues with increased costs, delays a result. The lack of components in some manufacturing businesses meaning products cannot be completed, leading to cancelled orders. This is one of a number of contributing factors for some businesses struggling with cashflow issues. A lack of other available materials is also frustrating businesses as they are unable to fulfil orders. In particular, metals, timber and electronics components are in short supply.

Labour Markets

Regional businesses, particularly for unskilled roles and roles in retail, are highlighting difficulty in recruiting sufficient numbers of staff, putting a strain on the staff they do have.

  • Cost of living wage increases – Views across the recruitment sector is that 1 to 2% rise in annual salaries are a thing of the past – expectations that annual salary increases of circa 5% will be the minimum expected by employees with rise in cost of living. This is likely to force employers to pay more or offer the option of reduced hours for the same salaries.
  • Flexibility – There has been a notable rise in companies offering flexibility with office/home working due to the increase in fuel costs, with most office-based companies now offering 3 days in office at a maximum.

Regional Growth

The East Midlands business activity index has shown that there has been an increase from 59.6% in February 2022 to 60.5% in March 2022. This was the fastest growth seen since July 2014. Firms stated that stronger client demand following the easing of Covid-19 restrictions drove the expansion in output.

Economic Predictions

If we look at the global economy, this is expected to grow by 2.8% this year, close to its post-GFC average. This partly reflects a recovery from Omicron early in the year and the quarterly pace of growth will be too weak to allow world GDP to make up lost ground compared to its pre-virus path.

China and emerging Europe are expected to underperform compared to most, whilst the major commodity producers will be among the few to outperform as prices stay elevated.

Possible Risks

There seems to be 2 areas of risks that stand out in particular. First, policy normalisation could be more damaging if stubbornly high inflation forces central banks to hike by more than economists expect and/or if markets take fright. Second, further large-scale virus outbreaks and lockdowns in China could have major adverse effects. So far, trade flows have been little affected. But broader and more persistent restrictions could expose vulnerabilities within the Chinese economy and in global supply chains.

Commercial Property

FHP report that despite the cost of living concerns we all have and increased inflation, the commercial property market, particularly in the manufacturing and distribution sectors throughout Mansfield and Ashfield continues to strengthen.

Record rents and capital values are being achieved and for any landlord or property owner looking to rent or sell their property, now is the best time ever to maximise returns. This scenario is being created by not only the strength of demand but also the complete lack of stock, stock levels are lower than for many, many years. Companies are having to hold more raw materials and supplies due to the impact of Brexit and delays in bringing goods into the country which is creating a need for more space so that suppliers can feed raw materials to their clients without having to factor in Brexit delays. All of this is creating further pressure on supply of manufacturing and distribution space hence why this coupled with strong demand is seeing rents and capital values increase across the board.