New Year, New Dynamics for UK Businesses: Stability or Uncertainty?

As we bid farewell to 2023 and contemplate the past, it becomes apparent that the year was marked by a series of challenges for UK businesses. With interest rates escalating through 14 consecutive hikes, coupled with increased costs and supply chain disruptions, the business landscape faced one hurdle after another. The ability to recall a time when businesses operated without the shadows of extreme external events might prove challenging, as the norm has become navigating through the ever-changing economic terrain.

Fortunately, amidst the turmoil, there are glimpses of optimism for 2024. For businesses seeking to plan ahead and grasp the current situation, this article delves into the economic events of 2023, projections for 2024, and crucial considerations for navigating the upcoming year.

2023’s key facts and figures

In contrast to initial forecasts predicting a 1% decline in GDP at the beginning of 2023, the UK economy outperformed expectations, with economists now anticipating a growth rate of 0.5%.

Inflation, which exceeded 10% in January 2023, experienced a significant decrease to 3.9% by December 2023, marking its lowest point in over two years.

Starting the year at 3.50%, the official bank interest rate rose to 5.25% by the end of 2023, with the last increase occurring in August.

Anticipated trends in 2024

The Office for Budget Responsibility (OBR) foresees a slightly improved outlook compared to the Bank of England (BOE), projecting a growth rate of 0.7% for 2024—still less than half the average annual growth rate between 1998 and the 2008 financial crisis.

Forecasts for 2024 indicate a continued easing of inflation, with the BOE expecting it to hover around 3% by year-end.

Money markets predict a potential one-percentage-point reduction in interest rates by the BOE, settling at 4.25% by the close of 2024.

Inflationary pressures subsiding

The decline in inflation to 3.9% by the end of 2023 is seen as a positive trend that is expected to continue throughout 2024. This not only alleviates cost pressures on businesses but also fosters a more stable economic environment. If early 2024 inflation figures align with expectations, it could pave the way for the BOE to consider rate cuts sooner, offering SMEs a much-needed sense of reassurance to plan for future growth.

Navigating interest rate trends:

Interest rates play a pivotal role in a business’s decision making, so higher or lower interest rates greatly influence a business's day to day cashflow and growth.

Interest rates stabilised after reaching 5.25% in August 2023. While economists hold varying views on when rates might start declining, a consensus suggests a potential reduction to 5.00% by end-June 2024 and finally coming down to around 4.25% by the end of the year.

Businesses that borrowed pre-pandemic (2020), before the interest rates started to rise, maybe coming to the end of their fix rate facilities and looking at borrowing again in 2024. If they benefitted from a fixed, lower interest rate deal the current higher interest rate environment could prove financially challenging.

Despite these challenges, this period of stability is beneficial for businesses planning their financial strategies.

Energy price uncertainties:

Recent months have witnessed some stabilisation in energy prices, yet the International Energy Agency (IEA) reports that spot LNG prices in the first three quarters of 2023 were considerably lower than 2022 levels. Predictions for 2024 vary, with some experts foreseeing lower energy prices. The recommendation to consider fixed rates in 2024 is highlighted, providing protection against volatility and potential price hikes.

However, that depends on finding a good price and a favourable 12-month or 24-month contract.

Onsite energy generation is one answer instead of buying from the grid, you can be protected from a volatile energy market and get long-term predictability over your energy costs. And with a range of different financing options, you don’t need to invest any upfront capital either. Installing Solar PV, CHP system (Combined Heat and Power) or a Heat Pump are a few on the options open to businesses.

Stability as the theme for 2024

Despite the challenges faced by UK SMEs in recent years, there is a glimmer of stability on the horizon. Economic indicators, such as unchanged interest rates since August 2023 and anticipated reductions in 2024, alongside halved inflation since January 2023, instil confidence. While energy costs may remain elevated, increased competition and alternative energy sources offer businesses opportunities to manage these expenses.

Reflecting on the broader economic landscape, which may have shifted since a business last acquired finance or reviewed their current debt facilities, meaning restructuring debt or exploring new debt solutions may unlock previously unnoticed cash flow, providing a foundation to capitalise on growth opportunities.

For those contemplating these financial decisions, it’s a good idea to obtain independent and specialist advice. The Banking & Finance Team at MHA offers comprehensive debt advisory services and funding solutions tailored to an individual business’s needs.

As businesses embark on various growth journeys, proactive debt advisory becomes a valuable asset in navigating the intricate landscape of commercial finance.