Affects on UK Business as a result of Ukraine Conflict
Energy costs will increase:
- Global stock markets collapsed and oil prices surged past $105 (£79) a barrel to hit their highest level for more than seven years on the first day of the invasion, tightening the squeeze on UK consumers in the process. Stock markets began to recover somewhat at the time of writing but the price of gold keeps rising – a classic insurance measure for investors in times of war - as worries grow about the impact of the conflict. Russia is the second biggest exporter of crude oil and is also the world’s largest natural gas exporter.
- If the situation in Ukraine deteriorates, oil and gas supplies from Russia may be interrupted, pushing up wholesale prices. The supply of oil and gas was already struggling to keep up with growing demand as the global economy picked up in recent months as Covid19 restrictions eased.
- The UK sources just 6% of its crude oil and less than 5% of its gas from Russia so the war in Ukraine will have little direct impact on our domestic energy bills but our European neighbours rely heavily on Russia for their energy and so there are concerns sanctions on President Putin’s regime could constrict supplies thus driving up prices worldwide as countries scrabble for alternative sources. UK consumers are already paying a high price for energy and fuel, with demand surging following the easing of Covid restrictions.
Freight shipping and transport costs will increase:
- Consequently the cost of air travel is set to rise this year as airlines face soaring overheads. Air freight costs have already hit levels never seen before of $15 (£11) per kg and with Western airlines now also avoiding Ukrainian airspace (and Russian airlines banned from Europe and UK airlines banned from Russia via retaliatory sanctions by the Kremlin) this will push up the cost of flying further still as they are forced to take longer routes. That is not good news for manufacturers, many of whom had switched in recent years from shipping cargo to air freight as a result of delays and diversions experienced at ports and harbours.
- Road travel is not getting cheaper either because manufacturers continue to struggle to secure supplies of semiconductors. Make UK has warned for some time of the impact of the surging cost of moving goods and manufacturers are clear they must pass these increased prices onto consumers.
Input costs (including raw materials and wages) will increase:
- That Russia is among the world’s largest precious metals producers – especially aluminium, copper, nickel, and platinum, all of which are key components for making electric batteries and computer chips – does not bode well for manufacturers reliant on these vital input materials.
- Affordability was already a key issue with prices rising much faster than wages throughout the pandemic but inflation is now increasing at a rate at which wages can’t compete. It is expected to climb above 7% this year, as the cost of living crisis ratchets up yet another notch. The cost of living therefore recently hit a fresh 30-year high as energy, fuel and food prices continue to soar. Already more than 17,000 chain store outlets - including retailers, restaurants, bars and gyms as well as banks, takeaways and hairdressers - closed across the UK last year, a trend that looks set to continue.
- As a result the Bank of England (BoE) says UK households must brace themselves for the biggest annual fall in their standard of living since comparable records began three decades ago. Trade unions reacted angrily to the BoE Governor Andrew Bailey’s recent call on workers not to ask for pay rises, to help stop prices rising out of control.
- That response was perhaps understandable given the news that annual food bills are set to rise by £180 on average over the course of 2022 and houseful energy bill will rise by upwards of £500 this year. Overall, the price of a basket filled with the 15 standard food items used by the ONS to calculate inflation rose by 8% in just 12 months last year. So far price increases have been recorded across 17,000 items in the supermarkets this year too.
- The UK economy has not seen anything like it since the financial crash of 2008 and this is just the start. Analysts expect price increases to go on for two more years as various price rises and supply problems filter through into the system. Manufacturers and retailers are thus likely to see their own costs shoot up while customers strive to keep their spending down by searching for cheaper products.
Potential increase in direct or indirect taxes on business
- What’s more, the UK has scant storage facilities, relying instead on a just-in-time model which means Britain will be more affected by short-term price fluctuations in the wholesale gas market. The Government has stressed that it has the power to impose emergency measures, such as ordering big industrial customers to temporarily stop using gas. This will be a worry for energy intensive manufacturers especially the UK steel industry though in the long term it may provide further impetus for the switch to renewable technologies in the drive to net zero.
- A similar concern is that Chancellor Rishi Sunak has been urged by the International Monetary Fund (IMF) to consider raising taxes on those “who have benefited most from the pandemic” as it warned of the inflation risks facing the UK economy. The IMF suggested that levying windfall or wealth taxes now could be one way for the Chancellor to address demand-supply imbalances when he unveils the latest budget forecasts next month. It also suggested the government raising more revenues in the short term to invest in a beefed-up version of its Build Back Better growth agenda.
- The next budget is therefore likely to be a painful one for business. We already know employers’ National Insurance Contributions (NICs) are going to increase by 1.25% and a new plastic packaging tax will be introduced from April 1st impacting most manufacturers.
- In the context of the above it would be futile to call for the NICs increase to be abandoned and the Chancellor has already made clear he will not back down. But it is clear that this year will be a very expensive one for businesses.
Rising Business Costs
In response to the rising cost burdens for business, Make UK is urging the Chancellor to use his forthcoming Spring Statement to delay the planned increase in National Insurance and examine other ways to ease business costs and boost investment. These include:
- Reinstate business rates relief for small businesses and bring forward the improvement relief and investment relief exemptions by 12 months
- Extend the Super Deduction scheme with a view to making it permanent at the Autumn Budget
Commenting, Stephen Phipson, Chief Executive at Make UK, said:
“Companies are now facing eye watering increases in costs which are becoming a matter of survival for many. While some of the increases are driven globally, the Government cannot use this as a shield from the fact some are self-imposed and, added together, are now forming a perfect storm for companies.
“As a result, the most immediate priority for the Chancellor in the short-term must be to use his Statement to do whatever it takes to support companies through this difficult period. The alternative is to leave many businesses facing a tipping point from which some will simply not recover.”