March 2009

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Sharp fall in fuel prices and raw material costs benefits manufacturers and contractors the most

- Business Inflation Guide (BIG) Q.4 2008 -

The cost of running a small business¹ in the UK has entered negative growth territory for the first time in recent history. Small businesses across the UK experienced a significant 2.9 per cent fall in costs during Q4 2008, according to the latest Business Inflation Guide (BIG) from MORE TH>N BUSINESS.

The BIG reveals the dramatic drop in costs is largely due to a sharp fall in fuel prices, down 18.3 per cent, and raw material costs, down by 11.95 per cent. Manufacturing and contractors recorded the strongest rate of deflation with costs falling by 4.3 per cent and 4.5 per cent respectively. Northern England was the region most affected, primarily due to its greater share of manufacturing firms, with a 3.8 per cent decline.

MORE TH>N BUSINESS warns that in real terms it is hard to see these findings as good news for small businesses. While small business owners will be happy to see costs reductions, this also indicates that markets are slack and people aren’t buying.

The BIG, developed in conjunction with Warwick Business School, is a quarterly index that measures a basket of 20 of the most important expenditure items for small businesses.

Head of MORE TH>N BUSINESS, Mike Bowman, said: “After a sustained period of rising inflation, small businesses now have to quickly adjust to this deflationary environment, with some benefiting more than others. Deflation will come as good news for transport and haulage contractors as they will see fuel costs come down due to a sharp fall in oil prices. However, deflation is bad news for businesses that have their assets tied to property or large amounts of stock already purchased, as it will be losing value day by day.”

Stephen Roper, Professor of Enterprise at the Centre for Small and Medium Sized Enterprises, Warwick Business School, said: “Small businesses will continue to experience deflation over the next quarter as the UK economy continues to weaken. As a short-term benefit, deflation will provide a much needed pressure valve for small businesses which are currently very cash constrained.”

However, Roper also highlighted the long-term implications: “We are seeing very specific deflation, caused by a sharp drop in fuel and raw material costs. While small business owners will be happy to see costs come down, it also indicates that markets are weakening and demand is low - which in the long term is not good for business.”

Regional breakdown
(per cent reduction in small business costs)

Northern regions -3.8%
Midlands and Wales -2.8%
Southern region -2.7%
Scotland - 2.4%

Sectorial breakdown
(per cent reduction in small business costs)

Contractors -4.5%
Manufacturing -4.3%
Small shops (retail) -3.4%
Private Services -2.6%
Homeworkers -1.7%

Overall for 2008, UK small businesses experienced a 3.6 per cent cost inflation on the previous year.

To view the Business Inflation Guide visit www.morethanbusiness.com/BIG

ENDS

1. Small businesses are defined as being businesses with less than 50 employees. Representing over 1.6 million businesses in the UK

Editor’s notes:

The data provided in this press release has been sourced from the BUSINESS INFLATION GUIDE commissioned by MORE TH>N BUSINESS.

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