2022 Sector Outlook

Adapting to new opportunities is key to success in 2022

View our 2023 sector outlook for Mid-Corporate

Building back better

Paul Kempster and Andrea Delay, Co-Heads of Mid-Corporate, believe SMEs have a promising year ahead as they continue to embrace the opportunities created by technology and sustainability in particular.

With SMEs across every sector having to adapt rapidly to changes in consumer behaviour, new market conditions and changing regulations as they re-emerged from lockdown, these past 12 months have truly been about building back better.

Many thousands of SMEs have not only survived, but thrived, particularly those that have embraced or are helping to drive the ‘e-conomy’ – whether it’s e-commerce, e-health, e-learning or e-tech, to name just a few – as the inexorable transition to digital continued to accelerate.

Of course, the experience of SMEs in hospitality and leisure has been more mixed, although many staycation-focused businesses have boomed, as have restaurants that were able to pivot their business model to deliver direct to customers at home.

There’s clearly a huge amount of pent-up demand for holiday travel and even this sector was bouncing back in the second half of 2021 – although its recovery could now be held back by the emergence of the Omicron variant.

Omicron may yet have implications for every industry, but we still believe SMEs can thrive in 2022 if they continue to flex to the changes in consumer behaviour we’ve seen in such a short space of time. These dramatic shifts – in how we live, shop, work and entertain ourselves – are almost certainly here to stay and business models need to adapt accordingly.

Tech transformation

Pent-up consumer demand is a key factor behind forecast GDP growth in 2022 to be the fastest since World War Two – albeit from a low base.

We’re convinced SMEs will tap into that economic recovery by continuing to embrace technology and e-commerce to reach customers directly, enter new markets, rationalise costs and address skills shortages.

And 2022 could be a pivotal year for SME investment in technology, given that liquidity among SMEs is as high as it’s been for some time as a result of a greater focus on preserving working capital and of the government support available during the pandemic. Many more businesses now have the cash to invest in the tech they need to scale up – and the extension of the £1 million annual investment allowance to March 2023 makes this an even more attractive prospect for many.

Sustainability goes mainstream

In the wake of the high-profile COP26 Summit last autumn, 2022 could also be a turning point for SMEs’ response to the environmental, social and governance (ESG) agenda.

Engaging with efforts to combat climate change – to take just one element of ESG – is not only ‘the right thing to do’ but a huge opportunity to meet the changing demands of consumers, who increasingly want the businesses they deal with to fall in line with their values. Actively addressing sustainability issues brings advantages in recruitment, too, with younger people in particular looking to work for employers that are seen to be taking these issues seriously.

Adopting more sustainable business practices can often also help to cut costs, as well as your carbon footprint. However, we know from talking to clients that many SMEs want to be more sustainable but simply don’t know where to start.

On that subject, and as just one example of our commitment at Barclays to do all we can to support SMEs, we’re delighted to say we’ve joined forces with digital aggregator SaveMoneyCutCarbon^, which provides an online platform that brings together products and specialist advice to help businesses make their operations more sustainable. Please get in touch if you want to find out more.

Sustainability is something SMEs simply can’t turn a blind eye to. Pressure on smaller companies to consider their carbon footprint will only increase as a result of climate risk disclosures that larger companies will have to make from 2023. And those larger businesses will expect their SME suppliers to have the necessary green credentials.

Life of leisure?

As we write, Omicron is casting a growing shadow of doubt, but we think pent-up consumer demand could also create opportunities for hospitality and leisure businesses to do exceptionally well in 2022.

As well as the desire many of us share for making up for largely missing out on big social events over the past two years, the pandemic has also prompted the so-called Great Retirement, which has of course led to increased numbers of people with extra leisure time to fill with trips to restaurants, cinemas theatres and the rest.

Keeping an eye on costs

Omicron aside, the underlying challenge for SMEs in 2022 is likely to be felt on the cost side of the balance sheet. Barclays is forecasting inflation to peak at around 5% in April 2022 before eventually settling at around 1.5% in 2023. Rising interest rates are also on the cards, with the possibility of a couple of 25-basis-point increases in February and May 2022, but fewer or more gradual rises after that.

There will, inevitably, still be some lag effect from Brexit, causing further supply chain issues and skills shortages and, on the back of interest rate rises, a potential FX impact on imports and exports.

As things stand, businesses will also face a year without furlough and other pandemic support schemes and, at the same time, will have to cope with VAT changes, the end of rent holidays and repayment of government loans. So, while many SMEs do have the liquidity ‘pot’ we mentioned earlier, some of this is likely to be eroded as some of these costs catch up with them.

Nevertheless, we’re very upbeat about 2022. Just look at what SMEs have achieved in the past two years – if they can succeed in such extraordinary circumstances, they can prevail whatever the challenges.

We’re sure the spirit and determination of the UK’s entrepreneurs will allow them to seize the opportunities available and help our SMEs to continue to steer a course away from the ‘storm’ of the Covid pandemic.

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