UK economy's 0.5% contraction in July and the future for SMEs

All the main UK sectors were affected by the decline which was blamed partly on the healthcare and teachers strikes, and wetter than average summer weather.

The disappointing setback comes after a 0.5% growth in June, as per the ONS. Forecasters had not expected a drop of this magnitude. Economists polled by Reuters had instead expected a 0.2% contraction.

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, warned of the possibility of recession after the latest GDP figures, saying “Today’s GDP drop of 0.5% provides further evidence that the UK economy’s resilience is starting to wane and suggests a shallow recession is increasingly likely over the remainder of the year.

The data could indicate a back-to-back drop in August, as recession fears mount for the end of 2023.

Commenting on the outlook for SMEs as GDP falls by 0.5%, Douglas Grant, Group CEO of Manx Financial Group PLC, said, “Latest GDP figures show that UK economic progress remains stagnant, having contracted by 0.5% in July, exacerbating the challenges weighing on SMEs as the country continues to teeter on the brink of a recession. As interest rates climb and inflationary pressures persist, SMEs must take this as a reminder to review their existing lending structures and ensure they remain ahead of the storm.

 “While some SMEs prepared for lethargic GDP growth by listening to lenders and locking in their debt into fixed rate structures, the economic situation for other businesses that were not as forward-thinking, is potentially cataclysmic. Due to supply chain disruptions, labour shortages, and spiralling inflation, businesses are in urgent need of liquidity provisions. According to our recent research, 40% of SMEs - compared to 27% last year - have had to stop or pause an area of their business due to a lack of external financing. The survey also highlighted that 15% of SMEs that needed external finance and/or capital were unable to access it. This lack of access to financing potentially dampens the growth of SMEs and the UK economy and will necessitate innovative solutions to provide a turning point in the cost-of-living crunch.

 “Following the implementation of short-term loan schemes in the last few years, we believe that it is vital that the government continues to expand measures to ensure SMEs are able to weather the challenges they are facing. We have been advocating for a permanent government-backed loan scheme that involves the collaboration of both traditional and alternative lenders to secure the future of our SMEs. As the government looks for ways to power the economy’s resurgence, a permanent scheme could serve as a critical factor in unlocking economic recovery for many companies, and in turn, sustain our economy.”

Also commenting on the status of SMEs in light of the sluggish economic data, John Glencross, CEO and Co-Founder of Calculus, said, “Today’s GDP data reflects a sluggishness surrounding the UK economy. While a technical recession remains at arm’s length, the challenging economic environment persists. We are, however, encouraged by the recent and significant revision of historical growth which changes the picture of the immediate post-pandemic recovery, notably compared to our European neighbours. Indeed, there are signs of long-term and credible support for UK business. The proposed launch of the London Stock Exchange’s intermittent trading venue or ‘ITV’ next year will further provide growth companies with access to new shareholders without having to list. It is positive that there appears to be continued effort and measures to make the UK a more attractive place for companies to grow and scale.

“Although initiatives such as the LSE’s ITV could provide invaluable access and support for UK companies, its target market is larger SMEs. It is the smaller end of the market which requires the attention and often where significant growth can occur. The Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) continue to support this section of the market – igniting growth and championing innovative UK companies. Calculus launched the first approved EIS fund 23 years ago. We are steadfast in our support of UK SMEs and with our invaluable experience of scaling companies in fast growing sectors, we can continue to provide innovative and tax-efficient venture capital investment opportunities for investors.”