Southampton: Consumer spending drives recovery in Q3, says Begbies Traynor

Businesses in Southampton are continuing to benefit from the UK’s economic recovery, according to the latest Begbies Traynor Red Flag Alert research for Q3 2013. Year on year, Southampton businesses experiencing ‘critical’ distress levels fell by 26%. 

And the wider South East region follows the ongoing improving national trend with a 27% annual decline in ‘critical’ distress levels.

Quarterly, however, there is a slowing trend, with businesses across all sectors in the region experiencing a 4% reduction in ‘critical’ financial problems, falling from 670 in Q2 2013 to 642 in Q3 2013. This slowdown was potentially impacted by Southampton, which posted a 54% quarterly increase in businesses in ‘critical’ distress, with 20 companies with problems compared to 13 in the previous three months.

The national quarterly picture showed levels of ‘critical’ financial distress among businesses decreasing 2% compared to 9% in the previous three months.

The overall positive figures are being attributed to rising confidence among South East consumers, with hotels, bars & restaurants, and general retail all experiencing marked quarterly reductions in businesses suffering ‘critical’ distress, falling 31%, 31% and 23% respectively.

This uptick in consumer activity made up for subdued summer trading within the UK’s core services sectors. Again at regional level, the statistics bear this trend out, with professional services, financial services and support services all experiencing increases in ‘critical’ distress levels during the past three months, rising 60%, 22% and 21% respectively.

These increases bring the total number of South East services businesses suffering ‘critical’ distress up to 84.

While SMEs’ proportion of financial services businesses in ‘critical’ distress in the South East was only 47%, it was a different scenario in support services with 80% of businesses in ‘critical’ distress being SMEs and 100% in professional services.

This suggests that the recent improvement as reported in the latest Markit/CIPS PMI data is being fuelled by the larger companies within these services sectors. According to Begbies Traynor’s analysis, declining net worth and increasing working capital deficits are driving the reported increases in distress among this group.

Gavin Savage, director at Begbies Traynor in Southampton, commented: “Following a well-documented second and third quarter surge for the UK services sector, this positive momentum masks a worrying picture among the industry’s SMEs. And the local statistics seems to chime with what is happening at national level. While transactional volumes have picked up across the sectors, they have remained at historically low levels, meaning that smaller, people businesses have struggled to maintain market share during the fallow summer months in the face of competitive pressure for new business from their larger peers.

“Given their significant high fixed cost bases and working capital requirements, the hopes of these SMEs will be firmly pinned on strong trading in the final quarter of the year, while effective management of their cost base and an improvement in the lending environment will be crucial to reverse this worrying trend.”

Savage added: “Celebrating a return to form, consumer-facing industries have seen significant reductions in ‘critical’ distress levels, both on a quarterly and an annual basis, following a strong summer of sales aided by the extended period of good weather across the country. With market sentiment improving and rising house prices giving homeowners increased confidence, consumer spending is proving to be the engine driving this recovery; good news for the consumer-facing sectors, which are so dependent on a positive Christmas trading period.

“However, with pay growth still lagging behind inflation, this consumer-led improvement could have worrying consequences for the wider economy as new research from the British Bankers' Association suggests that this resurgence is being funded by a rise in household credit, which has increased for the first time in four years. With rising property values prompting still more consumers to increase borrowing, even amid fears of an imminent housing bubble, we are reminded of the boom years prior to the economic downturn of 2008, and hope that this is not a sign of UK consumers repeating past mistakes.”