Middle market businesses present a headache for Bank of England - claim
New data released by leading audit, tax and consulting firm RSM UK shows that many middle market businesses are performing well, with sentiment and growth on the up.
Whilst this is good news for business, it presents a problem for the Bank of England (BoE) as it grapples with inflationary pressures.
The RSM UK Middle Market Business Index (MMBI)*, a quarterly survey of 411 senior executives at middle market companies conducted from 5 - 25 July 2023, jumped to 146.5 in the current quarter (Q3), its highest level since the survey began in 2021.
The big jump in the proportion of firms increasing prices in Q3 (46 per cent in Q2 to 55 per cent in Q3) led to a surge in the proportion of firms saying their turnover and profits rose (43 per cent to 53 per cent and 42 per cent to 54 per cent respectively).
But whilst the proportion of firms saying they were having to pay more for their inputs fell (72 per cent to 65 per cent), the increase in the number of firms increasing their prices suggests inflation may fall only slowly.
What's more, there was a major increase in the proportion of firms saying they were hiring more people (43 per cent to 54 per cent) and in the number of firms paying their people more money (44 per cent to 55 per cent). This could pour more cold water on any hopes that the labour market is about to materially ease.
Thomas Pugh, economist at RSM UK comments: “Our latest quarterly index reveals that many middle market businesses are in good shape.
“Much of the increases we are seeing in our index stem from an improvement in the ability of firms to pass on price increases to their customers, which is driving a significant increase in expectations around revenue and profits.
“While that doesn't necessarily mean the underlying economy is booming as most economic data is adjusted for changes in prices, firms would be unable to raise prices unless underlying demand was strong.
“This suggests that the economy is likely to avoid falling into a recession, at least over the next six months.
“But our latest MMBI data won't be looked upon favourably by the BoE given the challenges they face.
“The Monetary Policy Committee (MPC) has emphasised that the labour market will be key to its decision to increase interest rates again, so higher pay growth suggests more rate hikes are coming down the track as the MPC may have to do more to suck demand out of the economy.”
Mark Taylor (pictured), regional managing partner in the Midlands at RSM UK, added: “Rising interest rates are very much front of mind for both households and businesses.
“With businesses forced to pass on price increases to consumers, the hope is that the rising cost of goods, combined with higher mortgage payments doesn't cause a harmful knock-on effect on the Midlands' leisure and hospitality sector as the scope for discretionary spending tightens.”
RSM's MMBI presents unique insight into the health of the middle market - the engine room for growth in the UK - whilst drawing on credible forward-looking indicators to deliver predictive economic insight over a six-month period. The latest full report will launch on 5 September and can be viewed here.
