The cost-of-living crisis has dominated recent commentary with headlines leading on inflationary concerns and related interest rate rises. Naturally, discussion has focussed on the implications of these increases for consumers and households, particularly the squeeze on spending. But this shock to family budgets has wider implications, not least for businesses reliant on consumer demand. Indeed businesses, many of which were also constrained during the pandemic, have also been subject to these same rising costs. So, in light of the recurrent difficulties since 2020 how has our local business population been impacted?
Typically, in any year we would expect a certain number of businesses to start up and to close in an economy. This process of churn is thought to be essential for growth in the long-run as it allows new ideas to thrive via start-ups while the stagnant or unproductive exit the market. In Northern Ireland between 2015 and 2020, there have been an average of around 6,000 new businesses started each year, based on official business registration data.
Measuring business deaths, or closures, in the same way indicates that there have been around 4,500 business deaths annually over the same period. The excess of business births over deaths has resulted in an overall net addition of businesses to the economy but COVID-19 and more recent economic turbulence have disrupted these typical trends.
During the pandemic, official data, on a quarterly rather than annual basis, was introduced to provide more timely indicators of its impact on the business population. As might be expected, business births in Northern Ireland plummeted to a low during the second quarter of 2020, coinciding with the initial lockdown period. The first quarter of 2021 saw a reversal, with a record high of 2,400 business births, in part reflecting stalled start-up activity from 2020. While the first half of 2022 initially suggested a return to trend, the recently released quarter three figures again show a record low number of start-ups.
Business deaths have also not returned to trend and remain elevated compared to pre-pandemic times. In fact, while 2020 saw the number of business closures reduce, in part due to the government measures to support businesses, closures increased continuously over 2021 reaching a high of just under 2,500 in the third quarter alone. The figures have stabilised at just under this level for the first half of 2022, but these levels are twice as high as we would normally expect. Indeed, the net result is that from mid-2021 onwards Northern Ireland has lost more businesses each quarter than it has created, with the largest net loss of 1,000 businesses occurring in quarter three of 2022.
Data from the Business Insights and Conditions survey on the trading climate can help us better understand the forces underlying these trends, particularly around costs which impact the propensity to start a business and the ability to continue trading. It is no surprise that during the pandemic trading conditions were tough, with repeated closures and social distancing requirements negatively impacting trading. By early November 2020 two fifths of businesses in Northern Ireland were still reporting reduced turnover compared to what they would normally expect but the business supports staved off closures and fewer than one in ten indicated a moderate risk of insolvency. At that stage businesses did not appear unduly worried about costs with just under 10% reporting that the price of goods, materials or services had increased more than normal.
Around a year later in November 2021 amidst improving circumstances, the figure reporting decreased turnover had more than halved. The risk of insolvency had also reduced with around 4% suggesting that the risk was moderate. At that stage, however, businesses were reporting the impact of wholesale gas price increases, with 30% indicating that production and/or suppliers had been affected.
Over the course of 2022 these concerns increased. The most recent survey data, reflecting conditions during September 2022 still indicates that a minority of businesses have reduced turnover, with 14% reporting a decrease compared to August. But when questioned about which of the current challenges are impacting turnover two factors stand out, the cost of materials and economic uncertainty, both of which were cited by around two fifths of businesses. The share in Northern Ireland identifying the cost of materials as a challenge was higher than the UK average. In fact, across the other UK regions economic uncertainty was recorded as more of a challenge to turnover than the cost of materials.
Despite turnover holding up, for the most part, exactly half of Northern Ireland businesses reported that the prices for goods and services they purchase had increased compared to August. Energy prices continued to remain a particular concern with 55% of businesses reporting that production and/or suppliers had been affected by energy price rises. In identifying how they had dealt with the various price increases three fifths of businesses said they had absorbed costs while 40% stated they had to pass the price increases onto customers. In the medium term, in the face of high inflation, it’s unlikely that either of these actions are sustainable, particularly when combined with reduced consumer spending.
Business expectations into November reflect this concern. This month, which marks the beginning of the festive trading period, sees just over half of businesses reporting that they expect turnover to remain the same. Less than one fifth expect turnover to increase while 13% expect to see a fall in turnover. Across the UK, Northern Ireland businesses have the lowest share expecting to see a decrease in turnover, but they also have the highest share reporting that they are unsure of the impact. In the face of prevailing high costs and while such uncertainty persists, we may therefore continue to see the impact of these challenging trading conditions reflected in a lower level of business start-ups than normally expected and potentially, a higher number of closures.