2022 Sector Outlook

Lessons learned mean SMEs are in good shape to invest for the future

View our 2023 sector outlook for North and Scotland

Rising to the challenge

Jamie Grant, who leads our teams in Scotland and the North of England, believes many SMEs will be in a strong position to invest in new plant, products, people and markets in 2022.

As we came out of lockdown in 2021, businesses up and down our region and across all sectors showed incredible resilience and an impressive ability to adapt to changing market conditions.

Take the Scottish whisky industry as just one example of a sector that has continued to flourish despite the pandemic. As well as pivoting operations to produce much-needed sanitisers and gels, the industry has reaped the rewards of investment in premium brands and even new distilleries to deliver very strong sales across its global market.

Elsewhere, with the gradual relaxation of restrictions, hotels and other hospitality and leisure businesses in our region benefited as people opted for popular staycation locations, particularly in Lancashire, Cumbria and Scotland’s North Coast and Highlands.

However, my top takeaway from 2021 is how leadership teams have risen to the challenges of Covid to drive their businesses forward. Last year was in some ways a unique opportunity for leaders to think about different ways of doing things – and many seized the chance to rethink their strategies, optimise their operations, rationalise their cost base and make their supply chains more efficient.

That strategic thinking, plus government support schemes and a greater focus on working capital means many SMEs probably now have more liquidity than they’ve ever had. Whatever the impact of Omicron, if SMEs can utilise that liquidity and what they’ve learned during the pandemic, they’ll be in a good shape to move forward in 2022.

Ongoing pressures

Omicron aside, one of the key challenges for SMEs in the year ahead will be higher costs across the board, as reflected in the latest inflation figures. Whether that inflation is transitory or more permanent is the subject of considerable debate, but although it may recede, I think we’re unlikely to see it return to the low levels we’ve become accustomed to, and there are clearly going to be higher costs for businesses to absorb over the next 12 to 24 months.

Some sectors are still likely to struggle with labour and skills shortages, and resulting wage inflation, and there is also the fragility of some supply chains to contend with. The havoc created by the fuel supply crisis last autumn clearly demonstrated the vulnerabilities of just-in-time supply chains and this is a global phenomenon that’s unlikely to disappear any time soon.

Many SMEs may currently be in good shape from a liquidity point of view, but I think we’ll see greater pressure on working capital in Q1 and Q2 next year as we move into a higher GDP growth environment, at a time when government support loans will need repaying and built-up tax liabilities will become due.

Businesses will need to ensure they have the necessary capital structures in place to cope with these pressures next year – although we don't expect to see a significant increase in companies defaulting.

It’s worth mentioning that fraud is also a growing concern, as cyber criminals become ever-more sophisticated in their methods, with scams like CEO impersonation on the increase and remote working putting businesses at more risk.

Investing in the future

Despite the uncertainty around Omicron, I'm pretty bullish about 2022, with very robust economic growth forecasts and businesses with the liquidity to invest in new plant, products, people and markets.

In manufacturing, I think we’ll see more investment in machinery and technology to drive automation, and the food and drink industry should continue to see strong demand for products. Exploring new export markets is now high on the agenda of many SMEs. At the same time, the freeports being created in our region on the Humber and in Liverpool should provide a real boost for these locations not only as key trade gateways, but also in providing significant tax benefits to attract a range of businesses.

Adopting an effective environmental, social and governance (ESG) strategy will be both a key challenge and an opportunity for SMEs going forward, particularly those that feed into the supply chains of public sector organisations and large corporates, which will increasingly judge suppliers on their ‘green’ credentials. All businesses need to be thinking about their roadmap to cutting their carbon footprint and addressing sustainability issues this year.

The path to net zero will obviously be an ongoing challenge for Scotland’s offshore oil and gas industry, but cities like Aberdeen and Dundee are hubs of expertise and are investing heavily in the transition to renewable energy.

As a member of the Scottish government’s economic advisory board that is currently drawing up a 10-year strategy, I can say with confidence that renewables are going to play a massive part in the country’s future. Wind farms are already well-established, of course, but other technologies, like tidal wave power, are coming into the mix too.

Other sectors can contribute to efforts to build a more sustainable future in different ways. If I may return to Scotland’s whisky industry – it is again just one example of a sector leading the way by converting unwanted and low-value biological material such as draft and pot ale into high-value renewable chemicals, sustainable biofuel, and other commercially and environmentally valuable commodities.

Overall, I think we’re going into a positive 2022, with growth across the economy that can only help pull businesses through. There will of course be challenges, but I believe what businesses have learned through the pandemic will stand them in good stead, making them stronger and better equipped to move forward.

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