Why a recession could be the reset small businesses need

By Joe Calnan, below, Manager of Corporate FX Dealing, Moneycorp,

When it comes to the UK economy, nothing is certain right now. After weeks of freefall, the pound hovers at a two-month high but is still on the brink of a currency crisis. This is in addition to the numerous challenges small businesses have suffered through over the past few years. 

The 2016 Brexit referendum led to an onslaught of negotiations which meant business had to re-evaluate and ensure operations could continue running. The economic landscape then worsened due to Covid which saw a 14% rise in business closures, particularly affecting small firms. This period of uncertainty will only continue, with constant changes in leadership leading to core fiscal and tax policy changes causing small businesses to suffer further. What’s really needed is a fundamental shake-up; the global economy needs to be broken down to be rebuilt and become stronger in the long run. Or, put more simply, the looming recession may yet be our saving grace. 

The economy needs a reboot 

Small businesses have had continuous challenges thrown their way with little recovery time. Prices are already increasing at their fastest rate since the 1980s meaning companies are needing to be more financially prudent, leading to less jobs and higher unemployment. 

In comparison, the past 14 years have seen ultra-low interest rates and increased money supply, through quantitative easing, providing opportunity for great business growth. The low interest rates have meant cheaper borrowing for SMEs and loss-making start-ups, such as Uber, allowing them to grow rapidly and compete with well-established players in their industry. 

However, this was put to an end by the pandemic and the shockwave it created in global markets and supply chains. Inflation began to spiral and as a result interest rates are quickly increasing. To try and limit this, the Bank of England has now begun selling its gilts, thereby reducing money supply – which means businesses can’t risk any complacency. 

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There’s no arguing with the fact that inflation-fighting tactics like these will have a detrimental effect on growth, but it will be temporary. What they’re really doing is paving the way for an economic reboot. 

Viewed in the long-term, this could be the start of a path to a more sustainable economy. We’ll see the emergence of a more competitive job market, which means higher wages. That in turn means an increase in employee satisfaction, and therefore a growth in productivity – good news for both employers and employees. 

How businesses can prepare to weather the recession using FX markets

SMEs are the backbone of the UK economy. They make up 99% of UK businesses, employing millions. The impact of a recession will be devastating, especially for small businesses. However, there are things they can do to navigate this landscape and even thrive. 

Previous turbulence has already forced so many companies to break down their structure and rebuild. Research, from McKinsey & Company, showed the companies which re-examined their priorities – using strategic objectives and measurement, and adapting to new industry landscapes – have outperformed others post-pandemic. 

And while of course, smaller businesses will have less flexibility in their structure, there are still opportunities to pivot. With the right support, SMEs can be guided through this turbulence. At Moneycorp, as an FX Partner, we can support businesses by giving them access to different strategies and expertise to weather the storm ahead. 

Despite market fluctuations there’s still a general cyclical pattern. For example, after the not-so-mini budget announcement there was a dramatic drop in the pound – but it has now quickly recovered to similar levels. 

With FX markets constantly fluctuating, businesses can use this to their advantage – but the key thing I’ve seen as a dealer myself is that they mustn’t panic and they must plan ahead. For example, at Moneycorp we ensure customers have a strong policy in place that sets out the risk that their business can take on in FX markets, and the clear methods to reduce that risk as needed. If small businesses can continue to become more agile in their approach, and surround themselves with support, they’ll be able to navigate the peaks and troughs of this turbulent market. 

Individuals will struggle through the recession 

Whilst, in the long term, the economy should recover and be better off – a lot of people will still struggle in the weeks and months to come. This needs to be front of mind as the recession looms into reality – particularly for those in government and business. 

The general public are feeling the pinch in every aspect of their livelihood. With food, energy and housing prices all rising. For example, two-year mortgage rates hit a 14-year high in October 2022, as it was announced they’d surged to 6.07% – the highest since 2008. With such a gloomy backdrop across the board, consumers need a dramatic improvement. 

The continued flip-flopping on policy has caused market fluctuations and financial turbulence for millions of people including small business owners. If the economic landscape doesn’t improve then there is a risk to the 16.3 million people employed by SMEs. 

To enable sustainable growth, one theory is that the UK Government should focus more on the wellbeing of the population itself in order to recover economic growth. We’ve already seen how businesses that invested in wellbeing have grown since the pandemic. The idea is that we should be focusing on targets such as higher-quality education and healthcare, housing availability and affordability, and reducing the growing income gap between the richest and poorest. Taking the example of the pandemic, eight in ten people in the UK and US changed their behaviour to make work, home, family and finance work better for their wellbeing. It represented an unprecedented reset. And it’s one that could be repeated in the wake of a recession. 

Whilst a recession will be incredibly tough, it will pave the way for the fundamentals currently harming the economy to be broken down. A commitment to change and a focus on wellbeing could naturally boost GDP, not just temporarily, but also encourage sustainable growth making the country a better place to live. 

Short-term pain, long-term gain 

The global economy has been affected by the UK’s economic turbulence. The core reasoning for this turmoil still exists – poor decisions and shock changes in leadership create a rocky path for businesses and will continue to do so unless resolved. Right now, the UK’s small businesses and public are suffering with the continued descent into recession – but even as we navigate the chaos in front of us, we have to look at the long-term opportunities and what we want for our future. 

Until something changes, we could be seeing more small businesses having to shut their doors. 

None of the information contained in this article constitutes, nor should be construed as, financial advice. Moneycorp is a trading name of TTT Moneycorp Limited and is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (reference number 308919) for the provision of payment services.

SME Publications/ SME XPO 2024