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% in Q2 to 55% in Q3) led to a surge in the proportion of firms saying their turnover and profits rose (43% to 53% and 42% to 54% respectively).
But whilst the proportion of firms saying they were having to pay more for their inputs fell (72% to 65%), 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% to 54%) and in the number of firms paying their people more money (44% to 55%). This could pour more cold water on any hopes that the labour market is about to materially ease.
Paul Anthony, regional managing partner in the South 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.
Thomas Pugh, economist at RSM UK added: ‘While these figures don’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.
‘Overall, we think the UK economy will resemble a seesaw over the next year. On one end will be the recovery in households’ real incomes, driven by falling inflation and a robust labour market. On the other side will be the impact of the huge surge in interest rates that have happened over the last year and a half on households and businesses. Over the rest of this year, the positive side is likely to win out, meaning economic growth should improve in Q3 and Q4 after a moribund first half. But as we enter 2024 the negative impact of higher rates is likely to grow heavier. While we think the UK will avoid a recession, we’re expecting virtually no economic growth next year, meaning it wouldn’t take much to tip the balance in favour of a recession.’
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.
* The middle market is defined here as companies with annual revenues of £10 million to £750 million. There are close of 33,000 firms in the UK that fall into this category, accounting for 10 million jobs and one-third of private company turnover.
**The quarterly survey, conducted from 5 to 25 July 2023 among 411 senior executives, comprises 20 tracker questions administered to a panel of approximately 700 senior executives at middle market companies to gain their opinions on current and future business conditions.
***Index readings above 100 indicate economic expansion and below 100 indicate contraction.
The RSM UK Middle Market Business Index (MMBI), developed in partnership with leading data specialists Moody’s Analytics and The Harris Poll, is the first economic index to focus solely on middle market businesses in the UK. Launched in March 2022, the first-of-its-kind quarterly index presents a unique insight into the health of the middle market, whilst drawing on credible forward-looking indicators to deliver predictive economic insight over a six-month period. For further information visit Home Page – MMBI (rsmuk.com).
RSM is a leading audit, tax and consulting firm to the middle market with nearly 4,900 partners and staff operating from 31 locations throughout the UK. For the year ending 31 March 2022, RSM generated revenues in excess of £425m. RSM UK is a member firm of RSM International – the sixth largest network of audit, tax and consulting firms globally. The network spans more than 120 countries, over 830 offices and more than 57,000 people, with global revenues of $8 billion (US).
Moody’s Analytics supports firms and policymakers in strategic planning, product and sales forecasting, credit risk and sensitivity management, and investment research. Their economic research publications provide in-depth analysis of the global economy, including the U.S., all European countries, Asia, and the Americas. Moody’s Analytics tracks and forecasts economic growth and covers specialised topics such as labour markets, housing, consumer spending and credit, output and income, mortgage activity, demographics, central bank behaviour, and prices. Clients include multinational corporations, governments at all levels, central banks, financial regulators, retailers, mutual funds, financial institutions, utilities, residential and commercial real estate firms, insurance companies, and professional investors.
The Harris Poll is a global consulting and market research firm that strives to reveal the authentic values of modern society to inspire leaders to create a better tomorrow. It works with clients in three primary areas: building twenty-first-century corporate reputation, crafting brand strategy and performance tracking, and earning organic media through public relations research. One of the longest running surveys in the U.S., The Harris Poll has tracked public opinion, motivations, and social sentiment since 1963, and is now part of Stagwell, the challenger holding company built to transform marketing.
