We are back in the middle of a busy results season – our coverage is being constantly updated here – and while many companies are reporting rising profits, and dividends, nevertheless there is an underlying thread of unease running through the announcements. No prizes for guessing what’s troubling company bosses. The headwinds of inflation, energy costs, supply chain issues, Brexit and pandemic-related disruption to so many aspects of our working and social lives show no sign of easing up. Troubled AO World identified several of these (costs and supplies) this week as the root cause of its second profit warning. As noted by our contributor Neil Wilson: “Margins in a highly commoditised business are wafer thin at the best of times. Now supply chain woes coupled with a shortage of drivers creates some serious headwinds... It now faces some new challenges which seem set to perform the double trick of hammering margins and lowering revenue growth.”
Labour shortages remain an issue (with some observers suspecting that the private sector’s loss is the expanding public sector’s gain), making it difficult and more expensive to attract and retain staff on top of demands from employees for pay rises to cover higher taxes and inflation-related costs. And a new Brexit chapter will begin when full customs controls between the UK and the EU come into effect on 1 January against a backdrop of a fairly fractious relationship.
Sluggish economic growth estimates, the curse of the 1 per cent growth rate, are another headache-inducing factor. The Office for Budget Responsibility thinks that while overall scarring of the economy from the pandemic will be just 2 per cent, down from 3 per cent, it predicts annual economic growth rates of 1.5 per cent over the next five years. Growth over the period from July to September fell back to 1.3 per cent, following more buoyant earlier growth immediately after lockdown was lifted.
Weak growth was one issue raised at the CBI conference this week. CBI director general Tony Danker wants the government to do more to help the economy grow, by investing more itself and aiming for the higher investing rates of other governments, overhauling the infrastructure pipeline, ensuring that regulators prioritise investment and innovation, introducing better tax rewards for businesses that invest and skill up their workforce, and addressing business rates reform. Danker has previously raised the issue of the UK’s “failing” business rates system, one flaw being that companies who decarbonise their operations, for example, by installing solar panels can face higher rates. He would like the government to lead the way on skills and training.
But compounding the low growth problem is the long-term low level of business investment. In a report by McKinsey & Company earlier this year it highlighted how broad-based technology adoption of the type that leads to competitive advantage tends to be concentrated in already digitally capable businesses. Outside of this circle the digitisation of many businesses and particularly smaller ones tended to be narrow, involving simply remote collaboration tools, while one survey from the Enterprise Research Centre revealed that two-thirds of smaller businesses and nearly half of medium-sized businesses said they had no further plans to introduce new technology. It’s hard to see how productivity can improve without investment
To pinch a line from a campaign being run by our sister publication the FT: “Let’s not go back to a past that wasn’t working anyway”. Businesses cannot afford to wait for growth to come to them, or for the corporate tax burden to be reduced. They must take the lead and drive change, otherwise the decade ahead will, as Danker fears, be a repeat of the low growth, low productivity of the decade past.