After a period of relative stability, companies have now been forced to adapt and overcome a series of extreme macroeconomic conditions and challenges. First, the COVID-19 pandemic forced organizations to implement a functional remote work model for their workforce seemingly overnight. The reality of the enacted lockdowns and other health and safety measures left a significant impact on certain sectors as they tried to adjust. In response to the pandemic, UK Businesses have also had to quickly embrace digital technologies and remote working solutions to keep their operations running. This has accelerated the adoption of e-commerce and online services, leading to a shift towards a more digital-driven economy
To stay afloat and weather the negative external pressure, SMEs (small and medium enterprises) may need to consult with professional financial advisors or insolvency practitioners. Although it may seem like a scary thought, turning to expert insolvency practitioners such as Hudson Weir could help businesses not only avoid liquidation but actually strengthen their financial positions. The consultants will examine the specific circumstances of the company and advise on the best course of action.
Why is Inflation Skyrocketing?
The term inflation denotes the general increase of prices over a period of time. As such, it also corresponds to a reduction in the purchasing power of consumers and money, in general. Some inflation is to be expected, and it is not a cause for alarm, but a rapidly increasing inflation could have a devastating effect on the economy. Following the reduced spending caused by the pandemic, people were starting to purchase more goods, resulting in a natural increase in inflation.
However, due to many companies having troubles procuring the raw materials or goods they need, prices of certain products have gone up, pushed by increased demand from consumers and lower-than-expected availability. But the main factor that is currently driving inflation up is the war in Ukraine. It has caused a sharp increase in oil and gas costs, which in turn has forced the price of electricity to spike drastically. Now, many countries around the world are projecting to have a double-digit inflation rate for the year. In the UK, inflation may surpass 13%; for the EU, annual inflation was 10.1% in August 2022, and the US reported 8.3% for the same period.
Why are Central Banks Rising Their Interest Rates?
One of the ways to slow down and control rising prices is by deliberately increasing interest rates. Doing so will make borrowing harder as the associated costs will be bigger. It will also simultaneously encourage people to spend less at the moment and try to save more. However, finding the right interest rate levels is a delicate process as pushing them too much up will have a negative impact on the economy as a whole, causing further problems for companies and consumers alike.
After sitting at historically low levels of 0.1%, UK interest rates have been adjusted multiple times in just a short amount of time. After the recent increase of 0.5 percentage points, the interest rate was brought to 1.75%, the biggest increase in the past 27 years for the country. Other Central banks across the world have acted in a similar way – the European Central bank recently decided to raise its main interest rate by 0.5 percentage points, while the US Federal Reserve has moved to rapidly increase rates to a range of 2.25% to 2.5%.
Effect of Higher Interest Rates on Companies
Having to deal with a rapidly increasing interest rate could be a detrimental factor in the short term when it comes to companies handling their current debt, as they will have to pay higher interest. Naturally, organizations with better earnings and profit margins will be able to absorb the increased financial pressure without major disruptions. On the other hand, companies with lower financial resources could experience difficulties covering their debt payments or be forced to reduce their investment and employment initiatives.
The challenging economic conditions demand careful decision-making, both from the regulatory agencies as well as the individual companies. With reduced earnings impacted by global factors and pressure to pay increased interest on their debt financing as a result of the higher interest rates, companies could find themselves facing some tough choices. To help identify the optimal route ahead, the help of professionals specializing in business recovery and corporate financial solutions could be indispensable.