More than half (53%) of businesses across Europe have shifted their focus away from growth and towards cost cutting, in response to rising inflation and interest rates, according to the annual European Payment Report from credit management services provider Intrum.
The 26th edition of Intrum’s study features the opinions of more than 10,000 companies across 29 European countries and sheds light on the intricate challenges that European businesses are grappling with in the face of sombre economic conditions.
Economic headwinds curtail business growth
With 68% of businesses anticipating inflation rates taking at least another year to stabilise at 2 per cent, many are pivoting from growth plans to cost cutting strategies in order to weather the economic storm. In the UK, just 37% of businesses expect inflation to take between a year and two years to stabilise, while 38% say it will rather take five years or more.
More than half (56%) of businesses are becoming more cautious with their borrowing and five year spending plans as they navigate rising lending costs, still complex supply chain issues and a competitive labour market. In the UK unemployment currently sits around 3.9%*, remaining at one of its lowest points since 1974, placing greater pressure on businesses to retain talent.
By sector, Energy and Utilities are exercising the greatest caution, with 60% of businesses within this practice becoming more mindful of costs, resultantly reducing spending and borrowing. Conversely, the insurance sector (50%) has shown the least caution but in half of cases is having to make difficult decisions in order to stay out of the red.
Across countries, the UK and Austria are the most cautious with three in five businesses (63%) halting spending, closely followed by Spain and Germany (61%).
In terms of what this means for growth, 51% of all businesses across Europe see inflation as restricting their ability to grow their businesses and seize new opportunities.
Across the sectors, the Real Estate sector is feeling the burden of inflation the most, with 56% of businesses here saying inflation is restricting growth ambitions. This is closely followed by Technology and Media at 54% and Hospitality & Leisure at 53%.
It is no surprise then that just under half of businesses (48%) describe their business today as weaker than it was compared to 12 months ago, in terms of revenue, efficiency, and ability to manage disruption.
The UK picture
The UK is in a particularly bleak position, with headwinds hitting the country hard when compared to most of its European counterparts. Compared to the European average of just over half (53%), 61% of UK businesses admitted they had shifted their focus away from growth towards greater efficiencies and cost savings.
64% of UK businesses are concerned about their ability to meet rising wage demands from employees compared to just 53% of European businesses. This is despite nine in ten (91%) UK employees having already asked, or are expected to ask, their employer for a pay rise in the next 12 months. While pay alone isn’t always the deciding factor for employees, those experiencing a real term pay cut will be looking to their employer to help bridge the gap.
Employees seek more from employers to tackle higher cost of living
While businesses look to cut costs, their employees are also being faced with rising costs as end consumers, pushing them to demand higher wages that rise in line with inflation. This reality however is causing a headache for businesses that are already under pressure, 53% of businesses across Europe admit that they are worried about meeting their employees demands for higher wages.
Across Europe, 9 in 10 (85%) employees have asked or are expected to ask their employer for a higher-than-average pay rise this year. In the UK and Finland, this figure stands at 91%.
In instances where a pay rise isn’t possible, there is a risk that businesses will see an increase in job dissatisfaction, a fall in productivity and disengagement from employees. The ultimate risk to businesses is employees leaving the business, which could cost more in the long-term to recruit and upskill new employees.
Anna Zabrodzka-Averianov, Senior Economist at Intrum, said: “Across the board, businesses are grappling with high inflation, increasing interest rates and a cost-of-living crisis. This has led them to prioritise cost cutting and divert from investing in growth and innovation.
“This has significant long-term implications both for businesses and the broader economy across Europe as inward investment is curtailed and innovation becomes a second priority. Businesses also cannot rely on passing extra costs onto consumers, who are also having to navigate difficult times financially. When competition is rife, upsetting customers and damaging their loyalty could be a difficult pill to swallow and one that businesses can’t come back from.
“Going forward, businesses mustn’t lose sight of growth as this will help long term recovery and ensure businesses come out the other side stronger.”