Good news for Britain’s SMEs as cost inflation falls to its lowest level for four years

POSTED: 2nd December 2013
IN: Newsroom

The annual rate of cost inflation for small and medium-sized enterprises fell from 1.2% to 0.7% in the third quarter of 2013, marking the lowest rate of inflation since 2009, according to the latest Aldermore Bank SME Cost Inflation Report compiled by the Centre for Economics and Business Research (CEBR).

  • Annual cost inflation among SMEs fell to 0.7% in Q3 2013
  • This is the lowest annual SME cost inflation rate since Q4 2009
  • Driven by 8% fall in costs of legal and financial services
  • Construction firms witnessing the highest cost inflation

The latest findings in Aldermore's quarterly SME Cost Inflation Report show that the annual rate fell by 0.5% in Q3, largely driven by the largest drop in legal and financial fees since 2002 (an annual fall of 8%). Business services firms, which saw costs falling by 0.7% year on year, particularly benefited from this reduction in fees.

However, SME construction firms faced the highest cost inflation at nearly 1.5%, due to increases in the cost of sub-contracting and building materials, alongside a boom in new housing construction.

Sluggish growth in employment costs also helped to reduce the rate of inflation, with wage expenses rising by just 0.8% year on year in Q3, down from 2% in the previous quarter.

Despite muted wage growth, business confidence continues to improve and as a result, SMEs are becoming more willing to invest. The average SME expects to increase capital investment by 2% over the next year - still below the pre-crisis growth of around 3%, but an improvement on the 1.6% growth seen over the past year.

The findings suggest that the UK's economic recovery is finally starting to filter down to small businesses as well. Over the past three months interest rates have begun to fall back, even for the smaller SMEs. The average interest rates offered to smaller SMEs fell to 4.71% in August 2013, down from 4.78% in May and from 4.75% a year earlier.

This news is a welcome boost for Britain's small businesses, and is a further sign that the UK's economy is on the mend, following on from the 0.8% growth in GDP seen in Q3.

Aldermore Group Commercial Director Mark Stephens said: "Cost inflation falling to its lowest level for nearly four years is a tremendously encouraging sign for SMEs across the country, and could provide a stimulus for many business owners to kick on and drive expansion in their business.

"However, company insolvencies are still abundant, with the number dropping only slightly, meaning that conditions are still tough.

"The UK is expected to experience stronger growth than any other advanced economy in 2014, at around 2.7%. This should make 2014 a brighter year for the UK's vast number of SMEs."

Aldermore Residential Mortgages Managing Director Charles Haresnape comments: "Government schemes like Help to Buy and Funding for Lending have undoubtedly boosted the housing market, which is good news for housebuilding firms.

"However, this means there is now a shortage of building materials for small and large house builders, resulting in higher prices for raw materials, thereby driving up costs for construction SMEs."

Cebr economist Katie Evans said: "The latest slowdown in cost inflation is encouraging for the UK's SMEs, who are a key driver of growth. The cost of oil and other commodities is expected to fall over the next year, a factor that may help to further ease cost pressures for UK firms."


Aldermore Bank Deputy CEO & Group Commercial Director Mark Stephens and CEBR's Katie Evans will be available for interviews between 10.30am and 11:30 on Monday 2nd December.

The full report is available here.

For further information journalists can contact:

Nicola York, Cicero Group,
+44 (0) 207 297 5965

Notes to Editors

Small businesses are defined as those with annual debit account turnover on the main business account of less than £1 million. Medium SMEs are those with annual debit account turnover on the main business account of between £1 million and £25 million.

Methodological note:

The figures presented within this report are calculated from a range of data provided by the Office for National Statistics (ONS), including the Producer Price Indices (PPI). In November 2013, the ONS updated the methodology of this series, rebasing from 2005 to 2010 to reflect changes in patterns of input use by firms and new products which have come to market in recent years.

This update has changed historical PPI data, and has resulted in some small changes to past readings of the Aldermore SME cost inflation indices. Any differences between figures reported in this and past reports is due to these changes in official data, and reflects the best information available to the authors at the time of publication.

For further information about Aldermore, our financial backers and our PR contacts, please review our Notes to Editors page.

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