Business optimism increases

Nearly two thirds (63%) of businesses expect economy to improve over next six months according to RSM UK’s latest Middle Market Business Index (MMBI)

• 69% of middle market businesses expect turnover to improve in next six months
• 64% expect to increase recruitment over the next six months
• 67% plan to increase capital expenditure in the next six months

Leaders of the UK’s mid-sized businesses are increasingly optimistic about the prospects for both the economy and their own companies. According to RSM UK’s latest Middle Market Business Index (MMBI), almost two thirds (63%) of the 400-plus companies surveyed said they expect the economy to improve over the next six months.

Furthermore, over two thirds of businesses (69%) expect turnover to improve in the second half of 2023, the highest proportion since the pandemic, while 67% expect profits to grow. 64% expect to increase the number of people they recruit over the next six months.

Thomas Pugh, economist at the leading audit, tax and consulting firm RSM UK, said: ‘Optimism amongst middle market businesses is starting to gather pace it would seem. The economy too remains remarkably resilient given everything that it has faced since the Mini-Budget in November. But more recent events show that inflation has dug its heels in. The smaller-than-expected fall in inflation in April will pile pressure on the Bank of England (BoE) to hike interest rates in June. Even more concerning was the acceleration in core inflation. But businesses should take heart from our most recent MMBI data in their bid to offset any further economic challenges. Whilst the road to economic recovery and growth might prove a little bumpier than we had anticipated a few weeks ago, we’re still confident that inflation will fall to 4%, or there abouts, by the end of the year, and so fuel growth in Q1 24.'

The headline MMBI stands at 128.5, slightly down on Q1 figure of 131.4, but well above the 2022 average of 120.2, where any index readings above 100 indicates economic expansion and below 100 indicates contraction. This demonstrates the middle market is still expanding, but more pointedly, is comfortably outperforming the wider economy, which is weighed down by public sector strikes.

The MMBI reflected several economic challenges, as business conditions deteriorated slightly. Double digit inflation, the drop in real household incomes and surging interest rates mean that after rising by 0.1% in Q1, GDP is likely to drop by about 0.2% in Q2.

Tightening in lending conditions, partly due to a 415 basis point rise in interest rates over the past 18 months, plus recent turmoil in the banking sector in the UK and US, makes it harder for companies to borrow to invest, and also reduces consumer borrowing, dampening economic activity.

With inflation still high, unsurprisingly almost three-quarters (72%) of middle market businesses paid more for their inputs in Q2, and 70% expect costs to continue to rise over the remainder of this year.

The proportion of businesses saying they recruited more in Q2 dropped to 43% down from 48% in Q1, and the number of vacancies also dropped by more than 200,000 since this time last year.

But whilst RSM’s latest data indicates both resilience and optimism among middle market business leaders, the more recent economic indicators will no doubt impact on short-term sentiment.

Thomas Pugh comments: ‘The most recent labour market data showed only the most tentative signs that the labour market is starting to ease, while inflation came in much hotter than the Bank expected. This suggests that the Monetary Policy Committee (MPC) is going to have to raise rates by more and keep them higher for longer to bring about the falls in inflation. Indeed, financial markets have gone from pricing in a peak in interest rates of 4.75% two weeks ago to a peak of 5.5% now.

‘Inflation should still fall sharply this year as goods and shipping prices drop back. The most important factor, though, will be getting some of the 500,000 people (almost 2% of the workforce) who have dropped out due to sickness since the pandemic back into work. That would materially ease the labour market and inflation and allow rates to peak at a lower level as well as boosting growth.

‘We expect the unemployment rate to creep up over the rest of this year, reaching about 4% by the end of 2023, but the economic recovery in the second half of the year will prevent firms from shedding staff in significant numbers. In fact, 64% of middle market firms said they were planning on hiring more staff over the next six months, which is slightly higher than in Q1.’

There was also an increase in the number of firms saying they will increase capital expenditure over the next six months, to 67% - the most in the MMBI’s history, and a significant increase on 59% last quarter. Thomas Pugh adds: ‘The firms that continue to invest now will be in the best position to take advantage when the upturn swings back round.’

For further information and to view the report visit https://www.rsmuk.com/insights/real-economy/mmbi