In June Starbucks started to report problems with many key supplies. As a result, customers flooding back into its coffee shops as lockdowns lifted found items off the menu. In the UK, pub and restaurant owners wait nervously to see how quickly restrictions on trade will be lifted. But they’re also hugely troubled by a lack of staff, hampering reopening.
In the Netherlands, the Central Bureau of Statistics says that almost one-in-five factories are facing supply problems, with limited raw materials and components causing an increase in costs. Output cannot keep up with demand, fuelling consumer prices, too. The global semiconductor shortage is hitting the French auto industry – hurting supply just as demand begins to grow. The same problem is being felt even more widely in German industry, creating fears about rising prices and the level of ECB interest rates.
The common theme? A rapid change of pace in the economy. In just 15 months, we’ve gone from virtual shutdown and temporary hibernation, to highly controlled ticking over as consumers have got used to Covid-19 restrictions – and now to rapid expansion as vaccination programmes reach critical mass.
That shift makes it much harder for businesses to get the resources they need in place to benefit from the bounce-back. Higher input costs, a scramble for skilled staff, choke points in supply chains and the lingering fear that this spike in demand might subside just as quickly as it appeared mean financial planning and forecasting are a high stakes game right now.
These problems are clearly visible in the data. ABN AMRO’s global economics report for May summed up what many economists are worried about right now: overheating and inflation.
Inflation: not an even picture
Fears earlier in the spring that we might see a return to 1970s levels of rampant inflation now look overdone – especially in the US. “We expect a period of catch-up growth in prices to make up for the shortfalls during the pandemic – perhaps exacerbated by temporary supply-side bottlenecks – but we do not see this degree of price growth being sustained,” says ABN AMRO’s report.
The picture is even better in the Eurozone, where lower levels of full employment suggest wage inflation won’t be a huge factor. The picture varies: higher prices in France aren’t visible in Spain, for example. And in the UK, the Bank of England chief economist Andy Haldane has been warning about both supply bottlenecks, soaring demand and staff shortages pushing up headline inflation.
In short, then, inflation remains a risk – and in some sectors it’s creating acute problems for businesses’ input costs. The traditional approach to rising prices is to stockpile. If you know prices are going to be higher next month, buy extra this month and keep your own prices competitive. Supply bottlenecks? Buy as much as you can when there is availability.
That also risks ratcheting up inflation (you’re effectively creating even more shortages in the market). But they might be sensible choices for businesses that can afford it. Having cash becomes the critical factor:
- If your suppliers have limited stock, they might prioritise cash payments over buyers demanding credit.
- If you buy in additional stock, you’re tying up working capital.
- Making additional sales as demand soars might mean extending more credit to more customers – another drain on working capital.
In all three cases, asset based finance can help. Invoice Discounting, for example, means you can take on fresh sales and extend valuable customers credit terms knowing that we can get cash back into your business straight away. Inventory Finance solutions also mean it’s possible to secure raw materials and products for resale to ensure your own onwards supply chain is less likely to be disrupted. And if inflation does tick up, having bought in advance at lower prices could even flatter margins for good sold later on.
Inflation is driven by so many factors, it’s hard to forecast. And managing your own working capital – so you have more options depending on where it goes – is a good way to hedge inflation risk.
What about ‘overheating’?
This is related to inflation. Additional demand and limited supply means prices rise. Covid-19 makes things worse. Economic activity, especially consumption, declined dramatically in 2020, and we’re starting to see a ‘catch-up’ effect. Many people have built up savings they now want to spend. Businesses reopening need to re-hire staff and spruce up premises.
This is more of a problem in the US and UK (ABN AMRO: “Eurozone GDP is expected to return to pre-pandemic levels around the middle of 2022;” the gap was closed in the US at the start of 2021…). But the big risk is that businesses gear up for a spike in demand in 2021 and 2022, only to see activity levels subside once the ‘Covid dividend’ is spent.
Central bank policy here will have a big effect on the decisions business take. The downside risk is that central banks exert tighter control over money. They’ve been printing a lot since the global financial crisis, and stepped up ‘quantitative easing’ to cope with the pandemic.
If you’re running a business in Europe, US interest rates might not seem too important. But we know that financial markets are heavily interconnected. If US rates rise, the impact on emerging markets and the Eurozone could be material. A longer, slower recovery on this side of the Atlantic means businesses need to prioritise cashflow forecasting and create options to thrive whether the economy takes a hit from overheating or not.
You can look at this as guarding against two outcomes. One is overtrading – tying up too much working capital as sales pick up and running out of cash. The other is investing in growth (new staff, new equipment, extra stock) only to find things don’t pick up as hoped.
That’s where other ABN AMRO Asset Based Finance options come in handy:
- Leasing plant and vehicles means getting extra capacity, but spreading the cost.
- Invoice Discounting creates financial headroom that moves in line with activity – and that is less dramatically affected by movements in base rates by central banks.
- Bad Debt Protection means peace of mind when taking on extra work or new clients whose own business might be affected by an overheating or stalling economy.
ABN AMRO analysis makes clear that the world is not moving in lockstep as the pandemic plays out. EU states and the US are catching up with the high vaccination rates in the UK; but their economies – and the options for their businesses – vary hugely. In other parts of the world, Covid-19 is still a huge and highly unpredictable factor – and could still have a dramatic impact on raw material prices, supply chain integrity and even demand.
We’re not out of the woods yet. Giving your business more financial space to make smart choices and options depending on how things play out is essential. We’re here as your financial wingman to make that happen.
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