SME Inflation At Four-Year Low

The latest findings in Aldermore’s quarterly SME Cost Inflation Report show that the annual rate fell by 0.5% in Q3, largely driven by the largest drop in legal and financial fees since 2002. Business services firms, which saw costs falling by 0.7 per cent year on year, particularly benefited from this reduction in fees.

However, SME construction firms faced the highest cost inflation at nearly 1.5 per cent, due to increases in the cost of sub-contracting and building materials, alongside a boom in new housing construction.

Sluggish growth in employment costs also helped to reduce the rate of inflation, with wage expenses rising by just 0.8 per cent year on year in Q3, down from 2 per cent in the previous quarter.

Despite muted wage growth, business confidence continues to improve and as a result, SMEs are becoming more willing to invest. The average SME expects to increase capital investment by 2 per cent over the next year – still below the pre-crisis growth of around 3 per cent, but an improvement on the 1.6 per cent growth seen over the past year.

The findings suggest that the UK’s economic recovery is finally starting to filter down to small businesses as well. Over the past three months interest rates have begun to fall back, even for the smaller SMEs. The average interest rates offered to smaller SMEs fell to 4.71 per cent in August 2013, down from 4.78 per cent in May and from 4.75 per cent a year earlier.

This news is a welcome boost for Britain’s small businesses, and is a further sign that the UK’s economy is on the mend, following on from the 0.8 per cent growth in GDP seen in Q3.

Aldermore Group Commercial Director Mark Stephens said: “Cost inflation falling to its lowest level for nearly four years is a tremendously encouraging sign for SMEs across the country, and could provide a stimulus for many business owners to kick on and drive expansion in their business.

“However, company insolvencies are still abundant, with the number dropping only slightly, meaning that conditions are still tough.

“The UK is expected to experience stronger growth than any other advanced economy in 2014, at around 2.7 per cent. This should make 2014 a brighter year for the UK’s vast number of SMEs.”

Aldermore Residential Mortgages Managing Director Charles Haresnape commented: “Government schemes like Help to Buy and Funding for Lending have undoubtedly boosted the housing market, which is good news for housebuilding firms.

“However, this means there is now a shortage of building materials for small and large house builders, resulting in higher prices for raw materials, thereby driving up costs for construction SMEs.”

Cebr economist Katie Evans said: “The latest slowdown in cost inflation is encouraging for the UK’s SMEs, who are a key driver of growth. The cost of oil and other commodities is expected to fall over the next year, a factor that may help to further ease cost pressures for UK firms.”