UK economy: quick overview
January 2023 saw the Prime Minister set out three economic goals – to halve inflation, to grow the economy and to reduce debt.
Consumer Prices Index (CPI) inflation has now more than halved from a peak of over 11% last autumn to 4.6% in October 2023.
The economy has also recovered more quickly than anticipated following the pandemic and amidst an energy crisis. By the middle of this year, the level of real GDP stood almost 2% above its pre-pandemic level.
The Office for Budget Responsibility (OBR) expects this growth to continue, but at a much slower rate.
Inflation will likely remain higher for a longer period of time than previously expected, taking until Q2 2025 to return to the 2% target.
But as inflation does fall and with public finances stabilising, the Chancellor says the government will now be able to action long-term decisions which will ultimately strengthen the UK economy.
Food and drink sector shows resilience
The latest Lloyds Bank UK Sector Tracker, which was published just ahead of the Autumn Budget, painted a positive picture for UK food and drink.
According to the tracker, the number of UK sectors reporting output growth increased for the first time in six months in October. Food and drink manufacturing specifically reported an output growth of 55.2% in October, having grown consistently since August 2023.
F&B producers also reported the strongest pick up in new orders of any sector. This was supported by manufacturers reducing their selling prices at the fastest rate on record, as the sector benefitted from falling input costs.
Annabel Finlay, managing director of food, drink and leisure at Lloyds Bank Commercial Banking commented: “The UK’s food and drink sector is certainly showing its resilience. The ability for businesses to lower prices charged to customers will be very welcome in the run-up to Christmas, helping producers capitalise on the consumer opportunities of the festive season.”
But that isn't to say it hasn't been without its challenges. This growth has been against a backdrop of economic turbulence. As managing director for The Flava People Scott Dixon, put it: "the last three to four years of trading has been brutal".
Whilst this has impacted all businesses, SMEs have been struggling the most.
"SMEs simply do not have the spare capital and leverage to weather these storms in the same way as larger organisations. As a result, SMEs have been disproportionately 'squeezed' by Covid, Brexit, booming interest rates, unprecedented inflation, and a natural cautiousness from customers," contended Dixon.
What has the Autumn Budget set out?
Tax reliefs and investment boosts
Among the promises set out in the Autumn Budget, the UK will be making full expensing a permanent feature in its tax system. Essentially, this is a tax relief scheme on machinery and buildings for companies.
Worth over £10 billion a year, full expensing is the biggest business tax cut in modern British history.
The OBR predicts this will unlock an additional £14 billion of investment over the forecast period.
The government is also making changes worth £280m a year to simplify and improve R&D tax reliefs, helping to drive innovation in the UK.
Commenting, Michelle Laithwaite, CEO and co-founder of Fuel Hub said: "As a fast growing business, especially one that creates meals in a large kitchen facility, we will greatly benefit from the continuation of full expensing. We have plans to expand the number of meals we're able to produce, and a key way to achieve this is through investing in large equipment, such as industrial cookers, fridges, and line machines.
"Now that there are incentives in place to do so over the long term means we'll be able to accelerate our expansion plans, such as entering into new markets like retail. While this is a welcomed measure, there are still other areas like energy costs and food inflation that will still need to improve in 2024."
The Food and Drink Federation (FDF), which was calling on government to make full expensing permanent ahead of the budget, has greeted the news warmly, alongside the Chancellor’s pledge to invest more fiercely into the UK manufacturing sector.
“As the UK’s largest manufacturing sector, we welcome the Chancellor’s focus on growing the economy and boosting investment,” Karen Betts, chief executive of the Food and Drink Federation, said. “Making full expensing permanent in particular will help to incentivise the investments necessary for companies to innovate and grow, and to continue to provide shoppers with high quality, nutritious and affordable food and drink.”
In a bid to unlock innovative investments that support the UK’s transition to net zero, the Government will be making £4.5 billion available to strategic manufacturing sectors from 2025 for five years.
Betts said the FDF was looking forward to working with the Government to determine how best to use the financial injection in food and drink, but cautioned that regulation could not be overlooked.
“While the focus is on headline tax rates, it’s vital that government looks at regulation too, which is driving unnecessary and increased costs onto company bottom lines, deterring investment and adding to cost of living pressures for households,” she added. “This is particularly true as the UK establishes a circular economy, which it’s possible to do at a lower cost and in more efficient ways, as demonstrated by other, competitor economies.”
At the same time, Made Smarter, a programme which helps SME manufacturers in food and drink to access technology and digital skills, will be rolled out nationally.
Last week, HM Treasury announced it was committed to expanding the Made Smarter Adoption Programme to all nine English regions in 2025-26 before working with Scotland, Wales, and Northern Ireland from 2026-27.
The programme organisers have welcomed the news alongside the aforementioned £4.5bn funding, stating that it demonstrates that 'UK manufacturing matters'.
Drinks sector raise glass to alcohol duty freeze
The budget also confirmed it would be freezing alcohol duty rates until August next year – causing many in the drinks sector to breathe a sigh of relief.
Alcohol duty is a tax charged at the point of production or importation of drinks with more than 1.2% alcohol by volume (ABV).
Reflecting on the announcement Ed Baker, managing director at Kingsland Drinks, said: “At Kingsland Drinks, we are relieved that the Chancellor has decided to not hamstring the UK wine and spirits sector even more by a further Excise increase. The recent August 1st increases are making the UK consumer pay some of the highest alcohol taxes in Europe which are now filtering through to higher pricing for them and lower sales for us; an additional rise would have damaged our industry even further.”
Stonegate Group CEO, David McDowall, agreed: “We welcome the Chancellor’s decision to place a freeze on the rate of alcohol duty and his commitment to continuing business rate relief. The business rate extension is particularly critical for our Publican partners, as for many it may be the difference between remaining open or having to close. As we enter the busy festive trading period, this announcement will provide some respite and comfort to the hospitality sector which has battled against a triple threat of soaring energy costs, rampant inflation and cost of living pressures over the past year. We hope to see the Government continuing to support the hospitality sector and doubling down on its commitment as we head into 2024.”
Missed opportunities?
But not everyone was happy with the outcome. While Dixon was pleased to hear about the Government's new-found prioritisation for SMEs and investment opportunities, he said further chances to support small businesses had been missed.
“Hearing the Chancellor taking about prioritising SMEs and opening investment opportunities is promising. Changes announced around pension reforms to increase the investment pot available for businesses, funds into the new ‘investment zones’, and more pressure on businesses to adhere to payment terms which will therefore increase the flow of money between businesses are all welcome. As too is extended 75% relief for our colleagues and clients within the hospitality and retail sector," said Dixon.
“However, there is more which could have been done. We need to make it more attractive to be an entrepreneur and to start and scale a business in the UK. SMEs account for 99.9% of the business population, and it’s these businesses which drive innovation and are the backbone of the country and its economy. Investment into AI, aerospace, etc, is needed, but so is investment into other areas – including food manufacturing. At the moment the risks still heavily outweigh the perceived benefits, and we need to shift that dial to continue to be a key player in the global marketplace.
“Price capping of energy would also have been highly welcomed to, at the very least, provide more predictability on our fixed costs. That said, necessity breeds innovation and at The Flava People we have been able to make huge strides to be more efficient as a manufacturer, which can only be seen as a positive.
“Finally, the rising minimum wage is a positive thing given the cost pressures many people are feeling at home. While we try and ensure team members are being paid above this level, for many businesses the increase will undoubtedly impact SMEs as we try and absorb those costs without having to pass on these costs. However, for those working to already tight margins, this could be the tipping point and it seems that support for people seems to have come with no consideration of support for businesses.”
Looking ahead
Commenting on the road ahead, the experts at Lloyd’s said there was no certainty that the positive news of rises in outputs in manufacturing will continue.
“It’s too early to say if this is a trend,” explained Nikesh Sawjani, senior UK economist at Lloyds Bank Commercial Banking. “All businesses continue to face challenges on a number of fronts, and their resilience could yet be tested further.”
Reflecting on F&B, Finlay added: “While it’s clear that the sector is confident in growing output over the medium term, as companies look ahead, food and drink manufacturers will continue to monitor the risks.
“There are still uncertain and dynamic economic conditions to navigate, so making sure that businesses have the working capital flexibility to weather both upturns and downturns will be key.”
Hopefully the promises set out in the budget will do just that, but we’ll have to wait and see.
