Supply chain issues have rarely been more prevalent as shortages of labour, skills, energy, components and raw materials cause major problems for individuals and businesses alike. With this in mind, NatWest recently conducted a study to find out what problems businesses are facing and how they plan to adapt.

We asked 155 small, mid-cap and large companies how long they believed this period of heightened cost pressures would last. If they expected higher costs to be short-lived, they could try to ride them out, whereas lasting pressures would be more likely to warrant strategic action.

Few expect the current supply bottlenecks to be over soon. Firms in finance and construction were the most optimistic about the bottlenecks being short-lived, but around half of the respondents see cost pressures persisting for a year or more.

We’d expect companies to adopt a rather defensive approach, accepting higher costs but trying to pass them on to their customers as much as possible.

Businesses are split on whether to pass on rising costs to customers

Do firms believe they could pass on price increases to their customers? There was a clear divide here: 46% said they expected to pass on half or more of any increase in costs (and most of these said they expected to pass on the full increase to customers), but a third said it would be difficult for them to sustain their margins faced with higher input prices.

There were some notable differences among sectors. Firms in manufacturing (52%) and services (60%) were most likely to report that they would pass on most of any higher costs. Those in retail and hospitality were least confident in their ability to do so.

Good help is hard to find, and wages are likely to rise as a result

Labour shortages in a range of industries have been hitting the headlines, and global surveys confirm that staffing is a constrained input. These shortages have a variety of causes, including:

  • lingering caution about catching Covid-19

  • people worrying about how their children will be looked after if schools close again

  • economic migrants to the UK returning to their countries of birth

  • high household savings, which mean people don’t feel a pressing need to return to work immediately

Unsurprisingly, many of our clients confirmed that they are having difficulties with staffing, with only 15% saying they have no problems in this respect. Many accept that they’ll have to work harder to attract the right people, with 37% saying it’s likely that they’ll consider raising pay. Interestingly, this was fairly consistent across sectors.

Adapting to cost pressures

By far the most popular way to address supply risks or cost pressures was via longer-term procurement contracts, even though that might mean locking in at higher cost. It was relatively rare, however, for our respondents to seek financial solutions to mitigate cost risks.

Few (12%) reported hedging energy or commodity prices and even fewer hedged against inflation. Only 3% said they were taking steps to reduce interest rate risk – even though nearly one in five view rising rates as a key concern.

A fall in the value of sterling was the other main worry. Those firms for which importing goods is a key part of their trade naturally tended to highlight this risk, although manufacturers were nearly as likely to see a weaker pound as a risk, highlighting the importance of input costs.

A tough operating environment, the effects of Brexit, and concerns over government policy

Despite wider talk of a recovery, there is clearly some pessimism, with several firms suggesting that the current environment is the most challenging they have ever faced.

But crucially, and perhaps surprisingly, few mentioned Covid as an explicit concern, whereas problems with shipping and staffing (or skills) were both frequently raised.

Comments about inflation and costs were common, with many emphasising wider supply-side problems, including elongated delivery times and lower reliability.

Although not explicitly the subject of any of the questions in our survey, Brexit was also raised frequently, with some quite detailed complaints about issues ranging from customs declarations to regulations and skills shortages. Risks relating to government policy and finance were also common themes.

But it wasn’t all doom and gloom, with some firms striking a more upbeat tone. Some suggested that the inflationary challenges they were facing were likely to be short-lived, while others stated they were still confident about the outlook for UK firms and were continuing business as usual.

The economy has far outpaced expectations, observed the bank’s Senior Economist and Head of Economic Forecasting, Marcus Wright, after the Autumn Budget. “At the time of the last Budget in March, the fear was joblessness as furlough expired,” he said.

“Since then, the UK has experienced a jobs boom. A modest rise in unemployment to 5.2% is now forecast by the OBR [the current rate is 4.5%], a marked improvement from the 6.5% estimate in March. And the OBR thinks job growth will remain robust through 2022.”

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

scroll to top