The latest problem in the UK economy is the rising cost of borrowing for businesses

(Bloomberg) – British businesses are already suffering from rising energy costs and rampant inflation. Now, higher borrowing costs are adding to the pain and increasing the risk of a recession.

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According to a survey by the Federation of Small Businesses, about half of small and medium-sized businesses said credit pricing and availability were “poor” in the three months through September. That’s the lowest in seven years, and one company warns borrowing costs have more than doubled in just over 12 months.

The poll is the latest sign of the bleak outlook for the UK economy, giving new Prime Minister Rishi Sunak a headache as he seeks to stabilize the country’s finances after September’s mini-budget pushed up borrowing costs. To make matters worse, the cost of living is rising at its fastest pace in four decades and consumer sentiment is near a record low.

“We are now seeing a lot of small businesses struggling to survive,” said Michelle Ovens, founder of trade group Small Business Britain. “The rise in interest rates adds another big spike to the cost push that small businesses face from all angles, especially around the vital business artery of cash flow.”

Swaps tied to central bank meeting dates see the Bank of England’s policy rate to peak at just under 5% in 2023, even as recent market turmoil abates. While that’s lower than in recent weeks, over the past year the benchmark has come in at just 0.1%.

lose money

Any surge in SME bankruptcies would have a knock-on effect on employment, as around 60% of the country’s private sector workers are employed by smaller companies.

The hair and beauty sector is one area that is already feeling the effects of rising costs. According to an industry association survey, just 35% made a profit in September, compared to 44% in July.

Restaurant and hotel owners also suffer from it. Kingdom Thenga, the owner of several catering businesses in the Chester region of northern England, has put on hold his plans to take out a mortgage to buy a pub he is currently renting.

An investment in a patio and retractable roof to boost activity at another venue has also been delayed until after Christmas at the earliest, he said, because consumer demand has plummeted. Borrowing costs have more than doubled over the past 12 to 18 months, he added.

Available income

“The mini-budget was an absolute disaster for small businesses,” Thenga said. “People’s disposable income has been pretty much crushed in an hour because their mortgages have gone up by £300 ($346) to £400, which is money they would spend on hospitality, retail, going out and holidays. “

Small businesses had already felt the pinch because so many had taken out variable-rate emergency loans during the pandemic, according to FSB national chair Martin McTague.

collapse of trust

Business confidence has “collapsed” as companies grow more nervous about the economic outlook, wrote Chris Williamson, S&P Global Market Intelligence’s chief business economist, earlier this week. The financial analysis firm said output is now falling faster than at any time since the 2009 financial crisis, excluding the pandemic.

The PMI reading “showed that companies have just started citing higher interest rates as a reason for a more bearish outlook,” said Ana Andrade of Bloomberg Economics. “If interest rates continue to rise and impact the broader economy, they will weigh more on business sentiment.”

Lower corporate investment is one of the signals suggesting the UK economy will contract in the fourth quarter, she added.

“Small businesses have traditionally tended to be nervous about taking on debt and this rate hike will only confirm those fears,” Small Business Britain’s Ovens said. “The knock-on effect is that many are discouraged from investing in growth.”

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