Good news for SMEs as cost inflation falls to lowest level for four years

THE annual rate of cost inflation for small and medium-sized enterprises fell from 1.2% to 0.7% in the third quarter of 2013, marking the lowest rate of inflation since 2009, according to latest figures.

The latest findings in Aldermore’s quarterly SME Cost Inflation Report show that the annual rate fell by 0.5% in Q3, largely driven by the largest drop in legal and financial fees since 2002 (an annual fall of 8%). Business services firms, which saw costs falling by 0.7% year on year, particularly benefited from this reduction in fees.

However, SME construction firms faced the highest cost inflation at nearly 1.5%, due to increases in the cost of sub-contracting and building materials, alongside a boom in new housing construction.

Sluggish growth in employment costs also helped to reduce the rate of inflation, with wage expenses rising by just 0.8% year on year in Q3, down from 2% in the previous quarter.

Despite muted wage growth, business confidence continues to improve and as a result, SMEs are becoming more willing to invest. The average SME expects to increase capital investment by 2% over the next year – still below the pre-crisis growth of around 3%, but an improvement on the 1.6% growth seen over the past year.

The findings, compiled by the Centre for Economics and Business Research (CEBR), suggest that the UK’s economic recovery is finally starting to filter down to small businesses as well. Over the past three months interest rates have begun to fall back, even for the smaller SMEs. The average interest rates offered to smaller SMEs fell to 4.71% in August 2013, down from 4.78% in May and from 4.75% a year earlier.

This news is a welcome boost for Britain’s small businesses, and is a further sign that the UK’s economy is on the mend, following on from the 0.8% growth in GDP seen in Q3.

Aldermore Group commercial director Mark Stephens said: “Cost inflation falling to its lowest level for nearly four years is a tremendously encouraging sign for SMEs across the country, and could provide a stimulus for many business owners to kick on and drive expansion in their business.

“However, company insolvencies are still abundant, with the number dropping only slightly, meaning that conditions are still tough.

“The UK is expected to experience stronger growth than any other advanced economy in 2014, at around 2.7%. This should make 2014 a brighter year for the UK’s vast number of SMEs.”