V4B Business Finance

The 5 Biggest Challenges For Businesses In 2023

2023 Business Challenges

2022 was a tough year for businesses, and the outlook for 2023 is at best uncertain. The chain of financial and geopolitical issues that impacted businesses in 2022 looks likely to continue to present problems. And world economic prospects for 2023 are bleak.

But what will be the biggest challenges facing UK businesses in 2023? To find out, we’ve explored the predictions of expert economists. Main concerns centre on five issues:

  • Continuing high inflation.
  • Slow economic growth worldwide.
  • Worsening energy crisis.
  • Rising interest rates.
  • Supply chain disruptions.

Ongoing inflationary pressures

When inflation is high, money doesn’t go as far. Businesses struggle to maintain profit margins as consumers cut back on spending, resulting in less demand for goods or services. At the same time, inflationary pressures raise business costs such as labour, materials, and energy. All this makes planning and investment decisions more challenging.

The annual inflation rate in the UK rose steadily in 2022, from 5.5 percent in January to 11.1 percent in October – the highest figure since October 1981. Looking ahead to 2023, 87 percent of SMEs in one survey believed that inflation would continue to pose problems for their business.

The National Institute of Economic and Social Research (NIESR) predicts inflation will remain well above 3 percent throughout 2023.

And the organisation warns that inflation could rise significantly above this figure if the geopolitical climate deteriorates and further disrupts supply chains. This could happen, for instance, if the war in Ukraine escalates or the USA/China trade war intensifies.

The NIESR says the UK faces a significant risk of recession in 2023 and expects wages to continue to fall in real terms until late in the year.

In November 2022, the Bank of England forecast inflation would stay above 5 per cent for the whole of 2023.

Other sources estimate inflation will average 5.5 per cent in 2023 – the same as the January 2022 level.

Slow world economic growth

The rate of global economic growth affects the UK economy because we have close trade ties with other countries. This is why the 2008 world financial crisis hit the UK so badly.

The Institute of International Finance (IIF) predicts a global economic growth rate of just 1.2 percent in 2023. This is on par with growth levels of 2009 as the world emerged from the financial crisis.

Neither is the Organization for Economic Cooperation and Development (OECD) optimistic about economic growth for 2023.

In November 2022, an OECD spokesperson and leading economist said the world was facing an extremely difficult economic outlook – not quite a global recession but a significant growth slowdown with high inflation persisting in many countries.

We may not be heading for a worldwide recession but many of the triggers are already in place, including higher-than-average inflation and supply chain disruptions.

The International Monetary Fund (IMF) foresees a tough 2023 that will “feel like a recession”.

Energy crisis forecast to peak in 2023

Soaring energy costs are a major challenge for businesses of all sizes as well as for families.

For example, according to the Federation of Small Businesses (FSB), gas bills for small businesses in London were 258 percent higher in February 2022 than 12 months previously. And electricity was costing 145 percent more.

In a September 2022 survey, 45 percent of businesses feared they may have to close as a direct result of their energy bills, even with government support. In another review, 89 percent of businesses said the energy crisis was a problem, with 33 percent regarding it as a major challenge.

Gas and electricity prices are expected to continue to rise in 2023, with the energy crisis peaking in or around April. According to the Energy Savings Trust, energy bills will remain high into 2024.

Rising interest rates in 2023

Central banks in the UK and around the rest of the world raise interest rates in a bid to combat inflationary pressures. This impacts businesses’ capability to borrow money to sustain growth or expand.

Results of a 2022 survey revealed that:

  • 82 percent of UK businesses regarded rising interest rates as a significant issue.
  • 24 percent were experiencing difficulties accessing finance such as loans or credit cards.
  • 71 percent feared problems in accessing finance going into 2022/23.

In November 2022, the Bank of England raised the base rate from 2.25 percent to 3 percent – the largest increase in more than 30 years. Continuing high inflation makes further rises in interest rates likely in 2023.

Predictions see the Bank of England base rate rising by above 4 percent in early 2023 and as high as 4.8 percent by July.

Supply chain issues

Supply chain challenges initially triggered by issues such as COVID-related backlogs and Brexit intensified in 2022 following the Russian invasion of Ukraine.

And they look likely to continue to cause upheaval, with 23 percent of UK businesses expecting supply chain issues to last until summer 2023.

This means more businesses could be forced to cut jobs and/or increase prices as supply chain costs increase, aggravating existing problems such as delays in production of goods or delivery of services, decreases in revenue, and loss of customers.

How to meet the business challenges of 2023

The ongoing perfect storm for businesses – including the war in Ukraine and the cost-of-living crisis – are setting the stage for uncertain times in 2023. However, the effects of these high-impact business risks can be mitigated in various ways.

For example, improving efficiency of production and delivery lines and continuing to ensure effective marketing helps in the battle against inflation.

Other measures to ease the business challenges of 2023 include:

  • Check whether you can switch energy supplier to get a better deal.
  • Access funds by looking for business loans with flexible terms. to combat rising interest rates.
  • Monitor and review inventory levels with a view to restructuring needs to lessen supply chain problems.

Despite the five big challenges facing businesses in 2023, it’s not all doom and gloom. Sixty-four per cent of businesses questioned in one survey said they were optimistic about their performance in 2023.

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