Almost two thirds of businesses abandon growth as inflation bites

26th May 2023

More than six in 10 (61 per cent) UK businesses have shifted their focus from growth towards cost cutting, in response to rising inflation and interest rates, according to the annual European Payment Report (EPR) from credit management services provider Intrum.

The study of more than 10,000 companies across 29 European countries surveyed 500 businesses in the UK, shedding light on the challenges that European businesses are grappling with in the face of sombre economic conditions.

With 75 per cent of UK businesses anticipating high inflation will last for at least another year, many are pivoting from growth plans to cost cutting strategies to weather the economic storm.

Almost two thirds (63 per cent) of UK businesses are becoming more cautious with their borrowing and spending plans as they navigate rising lending costs, complex supply chain issues and a competitive labour market. This is higher than the European average of 56 per cent.

By sector, hospitality and leisure businesses are exercising the greatest caution, with 80 per cent becoming more mindful of costs and reducing spending and borrowing. The insurance sector is least affected, but 48 per cent of these businesses are still having to make difficult decisions to stay out of the red.

The risk is that, as businesses rein in their spending, the economy will continue to slow without affecting the upward pressure on prices. With 58 per cent of UK businesses saying inflation is restricting their ability to grow their businesses and seize new opportunities, this is bad news for overall growth.While businesses look to cut costs, their employees are also wrestling with rising cost pressure, pushing them to demand higher wages. This is a further headache for businesses that are already under pressure. In the UK, 64 per cent of businesses admit that they are worried about meeting their employees demands for higher wages – the highest level of all surveyed countries.

In the UK, more than nine in 10 (91 per cent) of employees have asked or are expected to ask their employer for a higher-than-average pay rise this year. The European average is 85 per cent.

In cases where a pay rise isn’t possible, there is a risk that businesses will see an increase in job dissatisfaction, a fall in productivity and disengagement from employees. The ultimate risk to businesses is employees leaving, which could cost more in the long-term to recruit and upskill new employees.

Anna Zabrodzka-Averianov, Senior Economist at Intrum said “Across the board, businesses are grappling with high inflation, increasing interest rates and a cost-of-living crisis. This has led them to prioritise cost-cutting and divert from investing in growth and innovation.”

“A focus on cost-cutting has significant long-term implications both for businesses and the broader economy as inward investment is curtailed and innovation becomes a second priority. Businesses can’t rely on passing extra costs onto consumers, who are also having to navigate difficult times. When competition is rife, upsetting customers and damaging their loyalty could be a difficult pill to swallow and one that businesses can’t come back from.”

“Going forward, businesses must not lose sight of growth as this will help long term recovery and ensure businesses come out the other side stronger.”