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Trading conditions for smaller businesses

Economic forecast for SMEs

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How is the global economy shaping up for business?

Fears of an abrupt slowdown in China, combined with uncertainties about when the US will raise interest rates, have unsettled global equity markets. In turn, this has intensified the international economic headwinds faced by the UK. However, there will be some compensation in the form of a renewed fall in energy prices – which is providing a boost to income and profits, and will help underpin the domestic economy.

Although survey evidence has become more mixed, consumer and business confidence remains robust. Credit and debit card spending is rising strongly, buoyed by heavy outlays on more discretionary items, such as leisure and entertainment, and new car registrations moved to a record high in the autumn.

The near-zero inflation environment is likely to extend into the winter, before the impact of lower energy costs begins to wane and cause the rate to start rising towards the 2% target. Alongside strengthening earnings (regular wage growth in the private sector has risen above 3% from around 1% a year ago), this is giving a considerable boost to household budgets. Economic growth is also becoming more broadly based, with stronger capital spending joining consumption as a major driver of economic expansion.

Even though turnover growth has cooled for smaller businesses, it remains within the range normally experienced during periods of sustained economic expansions. As the trading outlook improves, there is greater opportunity to invest in the business, placing an increased strain on cashflow.

Monetary policy debate

Despite a continuing near-zero rate of inflation, the domestic case for raising interest rates appears to be gradually building, as earnings growth continues to strengthen. However, the Chinese slowdown has caused heightened concerns about the global economic outlook. This has led to widely expected rises in bank rates being pushed back until the winter of 2016-17.

Despite this uncertainty, there's general agreement among policymakers that, when interest rates do begin to increase, they're likely to do so only gradually and settle some way short of the 4% to 5% norm that prevailed prior to the financial crisis.

Source of ONS data: National Statistics

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