Government to Miss Inflation Target in 2023, UK Brokers Predict

The vast majority of SME finance professionals expect the Government to miss its target of halving inflation by the end of the year, iwoca’s Q2 2023 SME Expert Index finds.

The new research, carried out with over one hundred SME finance brokers “who collectively submitted nearly 1,000 loan applications in June, reveals that three quarters (75%) expect inflation to remain above 5.4% at the end of the year.”

This would mean missing Prime Minister Rishi Sunak’s January target of halving inflation from 10.7% “by the end of the year.” While inflation fell to 6.8% in July, core inflation remained flat at 6.9% and projections suggest August could “see rates rise again.” Fewer than one in eight brokers see “the 5.4% target as achievable by December.”

Four in five (81%) experts in small business financing believe “continued high costs over the next year will significantly reduce SMEs’ ability to grow their business.” This indicates that the Government’s other priority of “growing the economy may also fall by the wayside if inflation is not curbed swiftly.”

Exacerbating SMEs’ concerns is “the absence of support from traditional lenders.” A tough lending environment “for small businesses persists, as over four in five brokers (84%) say high street banks are reducing their appetite for funding SMEs.” This has increased “by 7 percentage points over the last three months.”

A similar proportion (81%) predict “demand for finance for SMEs will increase over the next 6 months, indicating that the funding gap for SMEs is set to widen.”

Despite the expected increase in applications, brokers do “not anticipate that the SME lending market will recover to pre-pandemic levels.” Over a quarter (27%) of brokers predict that the demand for SME loans will “not catch up to pre-pandemic levels for another 12 months – a record high proportion since January 2022.”

While the UK economy narrowly avoided “a technical recession in the beginning of the year, concerns are mounting that recession may still be around the corner.”

The proportion of brokers who “say their small business clients are ‘very concerned’ about the possibility of a recession has doubled since March to 20%.” Seven in ten (71%) brokers say their small business clients are concerned overall “about the possibility of a recession, up 8 percentage points from the previous quarter.”

Colin Goldstein, Commercial Growth Director of iwoca, said:

“Although the recent drop is welcome, the continued high rate of inflation is reducing small businesses’ ability to grow and invest, and brokers don’t have confidence that progress will be made by the end of the year. With high street banks continuing to pull back from SME lending, small businesses need attractive options for financing, or the significant growth potential that they offer the economy will be lost.”

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