How a 2022 recession can affect businesses
- 27 Sep 2022
2022 has been a difficult year for businesses in the UK, and this trend is set to continue. The Bank of England has warned that the UK will fall into recession this year. Indeed, interest rates have risen to 1.75 per cent in light of inflation soaring to 13 per cent. This alarming turn of events has been driven by low growth, soaring energy bills and the Russian invasion of Ukraine. The word recession can be daunting for businesses, but how exactly will it affect companies? Read on to find out.
Defining a recession
The basic definition of a recession is two consecutive quarters of decline in a country’s gross domestic product. However, there are many damaging effects that come from this economic phenomenon. When the gross domestic product declines, the economy shrinks. As a result, companies make fewer sales and jobs are lost. This is why the mention of recession can be frightening for businesses and professionals alike.
Cashflow and low growth
Restricted cashflow and low growth are two of the main impacts that businesses will notice from a recession. This is usually caused by inflation raising the cost of everyday goods. When combined with uncertain consumer spending, sales will drop and businesses will find that their cashflow is weaker. As a result, it can be difficult to grow a business as the economy stagnates more widely.
Credit impairment and liquidity
Credit impairment and liquidity issues can occur during a recession too. Banks will become more selective about the loans they offer during a recession. This can make it difficult for businesses to secure the capital they need, and liquidity is reduced. In this situation, it could be worth seeking financial advice from trusted consultants.
Decline in stock price
One of the knock-on effects for businesses is that there could be a decline in stock prices. The aforementioned reduced cashflow and lower profits will be entered into official financial statements and released to the public. As a result, dividends will fall and shareholders will become agitated, searching for new leadership or strategies.
During a recession, there are certain actions that businesses can take to safeguard their future. Much of this centres around cutting spending to cope with reduced sales. This could be through layoffs, negotiated bonuses and frozen wages. In the worst-case scenario, manufacturers will consider closing plants for the survival of the business.
A 2022 recession will hit businesses in the UK hard. From lowered cashflow to credit impairment, it’ll be a difficult time to navigate. But by following the guide above, you should be in a good position to tackle these issues.