Risk of recession looms but middle market is more optimistic for 2024

13th November 2023

New data released by leading audit, tax and consulting firm RSM has helped to allay fears that the UK economy is already in a recession. While the overall economy stagnated in Quarter 3 (Q3), conditions in the middle market, a key engine of UK growth, remained cautiously optimistic at the end of the year, helped by easing inflationary pressures. What’s more, middle market businesses expect conditions to improve substantially in the first half of 2024.

The RSM UK Middle Market Business Index (MMBI, a quarterly survey of 404 senior executives at middle market companies conducted from 2 to 20 October 2023, fell to 141.5 in Q4 after the high of 146.5 last quarter – indicating that even though business conditions were more challenging at the end of the year, the middle market is still growing.

Looking into next year, middle market businesses are more optimistic than they were in Q3. Over three quarters (76%) expect the economy to improve, up from 69% last quarter; and more firms expecting revenues (up from 75% to 80%) and profitability (up from 73% to 79%) to increase in the first half of the year.

In addition, inflationary pressures seem to be easing with the net proportion of firms saying they were having to pay more for their inputs, dropping to its lowest level in more than a year (from 65% to 54%), and the price middle market firms are able to charge to their clients from 39% to 24% – justifying the Monetary Policy Commission’s decision to hold interest rates at 5.25%. However, 58% of firms still expect to raise prices in the first half of next year, indicating that the inflation war is far from won.

The weakening in the index this quarter comes from 39% of firms saying the economy has worsened in Q4 (up from 28% in Q3), plus 34% stated a slowdown in revenue (up from 19% in Q3) and 35% confirmed a decrease in profit (from 19% in Q3).

Thomas Pugh, Economist at RSM said “Our latest quarterly index reveals that economic conditions for middle market businesses are tough as we see out 2023 with a fall in sentiment and growth. However, it’s a slowdown and not an outright contraction, which should help to allay any fears around a recession following stagnation in GDP in Q3.”

“A rebound in consumer spending as households’ real incomes are given a boost by strong wage growth; lower inflation; and big cost-of-living payments to low-income households, should bring back growth in the start of Q4. This optimism is reflected in the latest data and suggests that we should narrowly avoid falling into recession, but it wouldn’t take much to tip the UK into a second quarter of contraction. However, any economic malaise should be brief.”

“Admittedly, the UK economy is walking a tightrope to avoid a recession next year. The impact of the huge surge in interest rates on households and businesses and a significant reduction in government spending will weigh heavily on growth. The resurgence of household incomes should help, but middle market businesses will be hoping the Chancellor will have growth front and centre in next week’s Autumn Budget to ensure the UK economy, not only revives, but thrives in 2024.”