| Practice area: | Entrepreneurship & SMEs |
|---|---|
| Client: | N/A |
| Published: | 14 February, 2023 |
| Keywords: | SMEs business energy entrepreneurship inflation |
Jack Booth at London Economics explores businesses’ perspectives on energy prices and inflation in 2022 and early 2023.
Key findings for the February 2022-February 2023 period[1]
- Micro SMEs were least concerned about both energy prices and inflation.
- Small SMEs were most concerned about energy prices.
- Medium-sized SMEs and large enterprises were (roughly) equally concerned about both energy prices and inflation.
- Concerns about energy prices and inflation varied considerably across sectors.
- While concerns about inflation have eased, energy prices remain an important concern among businesses.
In 2022, the sharp rise in energy prices and accompanying inflation dominated headlines and caused significant problems for businesses.[2] On average, businesses experienced a 63% increase in electricity prices and a 124% increase in gas prices between Q3 2021 and Q3 2022.[3] The annual rate of inflation peaked at 11.1% in October 2022,[4] its highest level in decades.
In this first edition of SMEs in Focus, London Economics used the ONS Business Insights and Conditions Survey (BICS) to explore businesses’ main expected concerns in 2022 and 2023. The BICS is a voluntary fortnightly survey of businesses, which was originally set up by the ONS in March 2020 to gather information on challenges businesses faced during the Covid-19 pandemic but now focusses on a wider range of issues affecting businesses in the UK.[5] The present analysis focuses specifically on energy prices and inflation[6] – the most commonly reported concerns in the BICS – and analyses how businesses’ main expected concerns have varied across time, enterprise size classes, and sectors. Though the survey question that forms the basis of this analysis captures what businesses expect to be their main concern in the next month, this text uses the terms ‘concern’ and ‘expected concern’ interchangeably in the interest of concision.
Energy prices remain an important concern
Energy prices were one of the most important concerns for enterprises of all size classes (i.e., micro SMEs, small SMEs, mid-sized SMEs and large enterprises) throughout 2022, tending to be the main concern for 20-30% of businesses in each size class (Figure 1). Between February and April, the proportion of businesses expecting energy prices to be their main concern increased among all enterprise size classes, most prominently for those with 10-49 employees, rising from 22% to 28%.
As the weather got warmer and businesses’ use of energy decreased, the percentage of firms which expected energy prices to be their main concern also reduced, to 25% of businesses with 10-49 employees and roughly 20% for all other size classes. These proportions remained relatively stable throughout the summer months.
Businesses increasingly expected energy prices to become their main concern during the autumn, reaching a peak of 28-32% of businesses with at least 10 employees in October. However, this trend was not observed among the smallest businesses (0-9 employees), only 21% of which expected energy prices to be their main concern for October 2022.
Coinciding with the announcement of government support for businesses’ energy costs,[7] all enterprise size classes saw a decrease in the percentage of businesses expecting energy prices to be their main concern between October and December.
As was the case throughout the whole period (February 2022-February 2023), small businesses (those with 10-49 employees) remained most likely to be concerned (29%) and micro enterprises (0-9 employees) were least likely to be concerned (18%) by February 2023. There is no clear difference between large enterprises (more than 250 employees) and medium-sized businesses (those with 50-99 or 100-249 employees) regarding the prevalence of energy prices as the main concern for businesses.
As expected, energy prices were of varying concern to businesses across different sectors. There were two sectors in which an average of at least 40% of businesses expected energy prices to be their main concern between February 2022 and February 2023 (Figure 2). These were ‘other service activities’ (42%) and ‘accommodation and food service activities’ (43%). In fact, out of the twelve reference periods analysed for this SMEs in Focus, the smallest proportion of businesses in ‘accommodation and food service activities’ to report energy prices as their main concern was 29% (for May 2022), which was larger than the average across the whole time period for any other sector except ‘other service activities’.
In all sectors, an average of at least 10% of businesses expected energy prices to be their main concern. Those sectors in which energy prices were least concerning include ‘construction’ (11% on average), ‘information and communication’ (13%) and ‘professional, scientific and technical activities’ (15%).
As shown above, energy prices appear to remain an important concern for a substantial proportion of businesses. The next section focuses on concerns surrounding rising prices more broadly.
Inflation concerns appear to have eased
A slow rise in the proportion of businesses which expected their main concern to be the inflation of goods and services prices can be seen in most enterprise size classes between February and July 2022 (Figure 3). The largest increase is shown by large enterprises, from 22% in February to 32% in July.
|
Figure 3 Inflation of goods and services prices as main business concern, by enterprise size class (number of employees) (% of businesses) |
 |
| Note: In the survey, respondents were asked what they expected the main concern for their business to be in the next month. The horizontal axis in the figure refers to the first date in the month of the expected concern (for waves 51 and 53, where the reference period is defined relative to the interview date (“over the next month”) rather than as a calendar month, the horizontal axis refers to the earliest possible start date of the month of the expected concern, namely the first date of the survey live period). In cases where multiple waves referred to the same month, the average of the percentages in each wave was used.
Source: ONS Business Insights and Conditions Survey (BICS) |
Businesses’ concerns about inflation appear to have peaked during the summer months of 2022, as declines are seen between August and November. Whilst minor rises in the percentage of businesses reporting inflation as their main concern can be seen for some size classes towards the end of 2022, the importance of inflation as businesses’ main expected concern declines in all size classes during the first months of 2023. These expectations mostly relate to surveys conducted during December 2022 and the beginning of January 2023, at a time when inflation had started to reduce[8] and expectations of further reductions were in the news.[9]
Small, medium-sized and large enterprises tend to follow a similar pattern with regards to the proportion of businesses which expect inflation to be their main concern. Similar to the trend shown by concerns about energy prices, micro enterprises were the least likely to report inflation as their main concern during all twelve reference periods analysed. This fact may be related to the substantially higher proportion of these businesses which reported that they had no concerns for their businesses: between February 2022 and February 2023, an average of 22% of businesses with 0-9 employees expected to have no concerns in the next month, compared to 10% of businesses in the other four size classes.
As with energy prices, the importance of inflation as a business concern appears to vary substantially by sector (Figure 4). Inflation of goods and services is most concerning for businesses in the ‘construction’ sector, with an average of 40% of businesses expecting inflation to be their main concern in the next month between February 2022 and February 2023. In fact, it was expected to be the main concern for half of businesses in the sector in November 2022.
Inflation was the main concern for at least 30% of businesses in one other sector, ‘manufacturing’ (33%). In contrast, inflation was least important as a concern in the ‘information and communication’ (14%), ‘professional, scientific and technical activities’ (14%), ‘real estate activities’ (12%) and ‘transportation and storage’ (14%) sectors.
Concluding remarks
With regards to energy prices, many businesses still appear to be concerned going into 2023. Whilst wholesale gas prices have fallen in recent months, they are still much higher than those that businesses were used to before 2021.[10] Furthermore, the government has announced a less generous replacement for the current Energy Bill Relief Scheme, which will be in place by April 2023. As a result, it is expected that businesses will experience more “energy price pain” before they see the benefits of lower wholesale prices.[11]
Positive signs can be seen concerning inflation, with forecasts expecting inflation to reduce to 3.8% by the end of 2023.[12] This may explain the substantial decreases in the percentage of businesses reporting inflation as a main concern across size classes during the beginning of 2023. Nevertheless, this trend should be interpreted with caution, as there remain uncertainties around the path of inflation in 2023.
Notes
[1] This analysis is based on a survey question asking respondents what they expect their business’ main concern to be over a one-month period. In most waves, this period is either the first calendar month entirely after the survey live period, or the calendar month overlapping with the end of the survey live period (i.e., mostly after the survey live period). For example, wave 75 (the latest wave covered in this analysis) was conducted between 23rd January 2023 and 5th February 2023 and refers to the month of February 2023. For concision, this text refers to the reference period of the survey question as the ‘next’ month.
[2] For example: https://www.ft.com/content/d07797e7-2eb7-4240-b15d-692b39510def
[3] Department for Business, Energy & Industrial Strategy. (2022). Quarterly Energy Prices: December 2022. Available at: https://www.gov.uk/government/statistics/quarterly-energy-prices-december-2022
[4] Office for National Statistics. (2022). CPI ANNUAL RATE 00: ALL ITEMS 2015=100. Available at: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23
[5] Office for National Statistics. (2022). Business Insights and Conditions Survey (BICS) QMI. Available at: https://www.ons.gov.uk/economy/economicoutputandproductivity/output/methodologies/businessinsightsandconditionssurveybicsqmi
[6] Specifically, ‘Inflation of of goods and services prices’.
[7] HM Government. (2022). Government outlines plans to help cut energy bills for businesses. Available at: https://www.gov.uk/government/news/government-outlines-plans-to-help-cut-energy-bills-for-businesses
[8] Office for National Statistics. (2022). CPI ANNUAL RATE 00: ALL ITEMS 2015=100. Available at: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23
[9] For example: https://www.theguardian.com/business/2022/dec/29/five-charts-that-show-the-uks-economic-prospects-in-2023
[10] Cornwall Insight. (2023). Cornwall Insight’s response to the announcement of the Energy Bill Discount Scheme.
[11] Cornwall Insight. (2023). Cornwall Insight’s response to the announcement of the Energy Bill Discount Scheme.
[12] Office for Budget Responsibility. (2022). Inflation. Available at: https://obr.uk/forecasts-in-depth/the-economy-forecast/inflation/#CPI