UK SME annual cost inflation lowest since 2009

Aldermore Bank’s quarterly SME Monitor, compiled by the Centre for Economics and Business Research (Cebr), shows that this fall was driven by a reduction in employment costs, with average total pay falling back by 0.3% year-on-year in Q2, and declining physical input costs, which helped to constrain overall inflation.

These conditions favoured business services SMEs the most, where costs fell on average by 1.2% year on year in Q2 – a fall much greater than that of the SME population as a whole. SME manufacturers’ costs fell (by 0.1%) for the first time since Q3 2009, as a strong Sterling helped to reduce the cost of imported goods.

SMEs in the retail sector saw a reduction in inflation from 0.8% in Q1 2014 to 0.6% in Q2 2014, continuing the downward trend seen since the start of 2013. The construction sector took a more dramatic turn where reduced costs of physical inputs and employment saw inflation fall to 0.3% after the rapid growth of 2% in Q1, and is the weakest inflation rate since Q1 2013.

Q2 saw a plateau in business confidence, with a marginal decline during Q3 of 2014 as economic growth began to moderate. However, within the overall level of business confidence, optimism remains highest among SME firms.

Interest rates offered to the UK’s medium-sized companies continued to fall during the second quarter, with data showing they reached 3.2% in May 2014. This is the lowest rate since late 2009 and illustrates how credit conditions have eased since the financial crisis. However, loan pricing for small enterprises remains higher at 4.5%.

The number of insolvencies continues to decline year-on-year with just under 3,800 businesses liquidated in Q2 2014, down from over 4,000 in the previous quarter and from 4,300 at the same point a year before.

Mark Stephens, Aldermore’s Deputy Chief Executive and Group Commercial Director, said:

“Our latest SME Monitor shows that the cost pressures for SMEs have fallen back, which is encouraging after the rise in inflation we saw in Q1. A strong Sterling is driving a more prosperous market for SMEs, particularly for those import-dependent sectors such as manufacturing and construction, which were able to reap the benefits of the UK’s economic growth.

“It is encouraging to see that SMEs are benefiting from a strengthening economy, which is helping to prepare them for potential rate rises that could result in a tougher cost inflationary climate in 2015.”

Rob Harbron, Cebr Senior Economistm, commented:

“The UK’s army of SMEs are enjoying the twin positives of buoyant sales growth and only minimal increases in their cost base. This must be a welcome change after the turbulent past five years.

“Cooling demand from emerging economies and a weak Eurozone are likely to keep the cost of global commodities subdued. However, with the UK economy continuing to expand, faster wage growth must surely emerge in the near future, returning upward pressure to business costs.”