Small firms feel the pinch too

The past few months have seen a steady flow of redundancy ann-ouncements from major housebuilders and financial services companies affected by the credit crunch, such as mortgage lenders and credit card issuers.

However, coupled with these more obvious redundancies, the crunch is also starting to leave its mark on firms such as car manufacturers, holiday companies and airlines.

But while we ponder the impact worldwide financial turmoil is having on this country’s famous brand names, whether in the financial services sector or not, it is easy to forget the effect of the downturn on the UK’s army of small businesses.

The ripple effect of an economic downturn means that when big businesses suffer, their smaller counterparts also feel the pinch.

The latest unemployment figures only add to the feeling of unease, with the headline rate at its highest level since early 1999.

The recent increase in the claimant count was the seventh in a row and the biggest monthly increase since December 1992, during the country’s last economic recession.

The figures show the number of people out of work in the UK rose by an-other 81,000 between May and July, to 1.72 million, taking the official unemployment rate up from 5.3% to 5.5%.

The number of people claiming jobseeker’s allowance also increased by 32,500 to 904,900 in August, according to the Office of National Statistics.

In a further indication of the economic slowdown, the number of people in work and the number of vacancies both fell.

The British Chamber of Commerce (BCC) has already voiced its concern about the impact of the crunch on small and medium-sized businesses.

The organisation points out that increasing costs have affected a number of business sectors, with confidence balances in both the manufacturing and services industries dipping sharply, while cash flow for small to medium-sized businesses continues to linger in negative territory.

The BCC also says that small and medium-sized retailers are the most likely victims of a reduction in consumer spending because they are un-able to make savings by relying on the economies of scale – something that can traditionally be exploited by larger competitors that compete in the same market.

The rental and sales figures for commercial property are also continuing to be affected by the crunch, with many small businesses deciding to stay put and weather the storm in their current headquarters rather than meet the costs of moving.

In London, the picture is especially gloomy, with the property sector in the City continuing to suffer particularly badly.

Property specialist Savills recently reported a 41% slump in profits and predicts that as redundancies increase among financial institutions and commercial office space continues to be built, there will be a sharp increase in the number of vacancies when it comes to office space in London, with the famous Square Mile being particularly badly hit by the economic downturn.

However, in the regions the picture is less clear. Much depends on confidence among smaller and medium-sized businesses which can be affected by factors such as the performance of local house prices.

Government intervention in the regions can also play its part and it is important that regeneration projects and planned investments continue despite the bleak economic outlook so as to keep confidence levels stable in local communities.

It is clear that government intervention holds the key to the survival of small businesses in this country, not only in the help it decides to give the businesses themselves but also in the decisions it takes on interest rates.

Recent falls in manufacturing output and total industrial production have been bigger than expected.

It is disappointing that the benefits of a weaker pound in terms of improved export competitiveness have not been sufficient to offset the negative effects of a weakening home market for the manufacturing sector.

The Monetary Policy Committee faces a tricky balancing act with inflation on the rise, but it is likely that inflation will peak in the next three months and could fall next year.

Therefore, a reduction in interest rates could help to avoid a severe downturn and also assist in settling the rattled nerves of the small and medium- sized business community in these un-settled times.

Lloyds TSB may have saved HBOS, but not the high street