MMBI: Businesses hit the brakes on people and business investment as economic headwinds take hold

• Strong signs that deteriorating economic outlook is leading middle market firms to reassess hiring needs with just 41% of firms increasing recruitment, down from 52% in Q1.
  
• Proportion of firms saying they’re increasing capital expenditure dropped 13 percentage points, from 51% in Q1 to 38% at a time when RSM UK says businesses need to commit to productive investments.
  
• The overall MMBI dropped from 134.9 in Q1, to 120.9 in Q2 – the clearest signal yet of the impact the war in Ukraine, surging inflation, struggling supply chains and weakening demand is having on the middle market.
  
• Despite this, RSM believes the UK will narrowly avoid a recession over the next 12 months. 

Middle market businesses have hit the brakes on crucial people and business investment as inflationary pressure, recessionary fears, wage pressures and staff shortages all converge to reduce confidence.

RSM UK’s latest Middle Market Business Index (MMBI), the first economic index to focus solely on middle market* businesses in the UK, showed that fewer firms (41%) planned to increase recruitment in Q2, down from 52% in Q1.

The quarterly index and survey** of approximately 700 senior executives at middle market companies also showed a nine point drop to 54% in the number of businesses planning to recruit more staff over the next six months – showing the first signs that the labour market is starting to cool.

In addition, the number of businesses planning to increase capital expenditure significantly dropped from 51 per cent last quarter to 38 per cent in Q2– highlighting a potentially worrying U-turn on vital investment at a time when firms need to commit to enhanced productivity.

Thomas Pugh, economist at RSM UK said: ‘With the perfect storm of headwinds facing middle market businesses it’s not surprising to see them cautiously take the foot off the gas when considering investing in staff and vital capital expenditure. However, now is not the time to be cutting back on investment. As we emerge from the pandemic, businesses need to commit to enhancing productivity to stimulate the economy post-Covid.

‘Despite the first signs of the labour market cooling, it will remain reasonably tight for the next few years, especially in sectors which were previously reliant on a higher proportion of workers from the EU. Most middle market businesses are still planning to recruit more in the second half of this year, but a reduction in some of the excess demand for labour, will take some of the heat out of a red-hot labour market and, in turn, reduce the risk of future interest rate rises.’

Developed in partnership with leading data specialists Moody’s Analytics and The Harris Poll, the quarterly index also showed a significant drop from 134.9 in Q1 to 120.9 in Q2 in the headline index data – showing the clearest signal yet of the impact that economic headwinds are having on the middle market. Admittedly, at 120.9 the MMBI suggests that the middle market is expanding***. But the percentage of firms saying they expected the economy to improve over the next six months also slumped by a whopping 21 points.

Thomas Pugh continues: ‘The sharp deterioration in economic conditions over the last three months is clearly the biggest issue concerning middle market firms in the second quarter. Given the war in Ukraine, surging prices of energy and raw materials and clear signs of weakening consumer demand, it’s perhaps surprising that only 50% of middle market firms said the economy had worsened.

‘While we expect the UK economy to narrowly avoid a recession over the next year, surging inflation will cause a record-breaking slump in households real disposable income of around 2.5% this year, which will feed into weaker consumer spending in 2022 and 2023. As a result, the size of the UK economy is unlikely to exceed pre-pandemic levels.’

RSM’s MMBI presents unique insight into the health of the middle market – the engine room for growth in the UK - whilst drawing on credible forward-looking indicators to deliver predictive economic insight over a six-month period. 

For further information and to view the report visit https://mmbi.rsmuk.com