What does 2016 hold for SMEs?

On the whole, the outlook for SMEs and the economy as a whole looks brighter as we start 2016 than was the position a year ago.

A year of improvement

Then, I was concerned about Greece falling out of the Eurozone and the knock-on effects that would have across Europe, and the uncertainly of what government would be formed after the general election. I was also concerned that there may be a major price shock as oil prices increased suddenly after having been held artificially low by Saudi Arabia. My final major concern was what effect interest rate increases would have on SMEs and the economy as a whole. While these are still risks, the likelihood of them occurring or, in the case of interest rates, them being significant seems to have fallen dramatically.

The domestic economy seems healthier than it was a year ago. Inflation remains low and stable and employment rates have increased. Real incomes have risen for the first time since the credit crunch.

Recent research indicates that SMEs are more optimistic than they were a year ago. 54% believe that the worst is behind them and 25% say they expect to grow during 2016, with 56% expecting to stay the same size. Some 29% expect to look for growth finance within the next 12 months. This gives the impression of a slow steady growth expected rather than anything too speedy.

However, it is a mixed picture with the service sector doing better than manufacturing. The principal issue here is the continuing slowdown of the Chinese economy and their rebalancing from a principally export-led economy to one driven by the domestic market. However, exports to other countries have been increasing recently and can be expected to continue to do so over the next year.

Brexit

SMEs state that a major issue for them is forthcoming EU referendum. Interestingly, many SMEs report that it is the uncertainty as to what the outcome will be that is the issue rather than the likely effects of a Brexit itself. Clearly, this will primarily affect those companies which export to Europe and also those that feed into the supply chain of such companies. SMEs whose market is primarily domestic are much less concerned.

Interest rates

It is likely that interest rates in the UK will start to increase from their all-time low some time during 2016. The United States has started to increase its rates and it is likely that the UK will follow suit albeit with a time lag of maybe between 3 and 6 months. However, I don’t believe there is likely to be any sudden hike in rates as inflation remains very low and stable in the economy as a whole. However, all this could change if oil prices begin to rise significantly.

Costs of employment

On the employment side, many SMEs will be hit by two blows. The first is the implementation of the national living wage in April. SMEs who have been paying close to the minimum wage (principally retail and the food sectors) will feel the effects most acutely. In addition, the pension auto-enrolment scheme will put further cost pressure on companies.

Other issues

The perennial issues of low levels of bank lending to SMEs and the continuing tangle of red tape that affects SMEs proportionately harder than larger businesses remain to be tackled. Only time will tell if the Conservative government will do a better job here than the coalition did.

What do you think? What issues do you foresee looking ahead?

Gary Cousins
Business solicitor

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