Results from LCCI’s quarterly survey of London businesses, which is conducted by Savanta show a slightly more positive picture than three months prior, with business resilience shining through despite economic turbulence. However, domestic and export demand have not seen a return to pre-pandemic levels, and cost pressures remain high, suggesting the capital is still a long way off true recovery.
The cost of doing business is still growing
Inflation and business costs are continuing to heavily impact businesses in London. Large majorities of businesses reported an increase in energy costs in the first three months of 2023 (reported by 74%), or an increase in fuel costs (reported by 60%).
Whilst economic crises over the winter were not as severe as some had predicted, London businesses continue to face hardships. Despite avoiding a recession at the end of 2022, there are concerns about the reduction in energy support from the UK Government, which could have significant impacts on businesses. Corporation tax is also set to rise this month, adding additional pressure.
Two in five (38%) businesses reported a worsened cash flow in Q1, hitting micro firms the worst, with 40% reporting a deterioration in their cash flow in the first three months of the year. With a decreased cash flow, the increased cost pressures London businesses face are amplified.
Increased strains on finances are reflected in an increase in borrowing compared to last year. The net balance for the cost of borrowing (the proportion reporting borrowing costs have increased minus the proportion reporting that they have decreased) has risen from +27 in Q1 last year to now +46 in Q1 for 2023, suggesting that many are struggling to maintain sufficient cash reserves.
The importance of sales recovery
While borrowing can help businesses to weather cost increases to some degree, it is likely a short-term fix, particularly given the Bank of England’s repeated decisions to increase interest rates. This short-term ‘solution’ is increasingly only adding additional pressures to London businesses, with 48% noting increased borrowing costs this quarter. What these companies need is long-term stability to get back on track.
To tackle costs, businesses need their sales and orders to increase, whether domestically or internationally. However, sales metrics have remained relatively stagnant in the last few years, particularly for micro businesses. The net balance (the proportion seeing an increase minus the proportion seeing a decrease) remained negative in all but a few quarters since the start of 2019. Unless these metrics start to turn positive in the coming months, the economic outlook for London businesses remains bleak.
For London businesses, a rise in domestic and export sales and orders will alleviate the added pressures of keeping their businesses afloat. Raising sales will help stimulate economic growth in London by creating jobs, increasing investment, and boosting overall economic growth.
Motivation to succeed is undampened
The current state of the London economy is marked by businesses facing the harsh impacts of the cost of living and energy crises. However, despite the overall worrying economic outlook, businesses are still somewhat optimistic about their own financial outlook.
Two in five (39%) expect their turnover to improve over the coming 12 months, compared to a quarter (24%) who expect it to decrease, with the net balance increasing by 5 points compared to Q4 2022. Similar increases are seen in expectations for overall company prospects, the London economy and the UK economy. The challenges they face have not dampened their motivation to succeed. If this drive can be harnessed to push sales and revenues, we anticipate a decline in the reported pressures that businesses face.
Despite the challenges, London businesses have continued to persevere and adapt to the situation at hand, and our latest data highlights positivity for the future. However, while there has been progress, it is important to note that reported demand for London businesses remains sluggish, and the net balance remains below zero for both domestic and export sales. There is still a long way to go before the London economy fully recovers.