As the Ukraine conflict unfolds and the world watches on in horror, its effects on the UK economy become clear. And small UK businesses are likely to feel the effects of this conflict dearly.
When Russia invaded Ukraine on 24 February, the world was shocked. Since then, economies all over the world, including the UK economy, have been impacted. And it is likely, that as the Ukraine conflict continues, its impact will increase and put pressure on households and businesses in the UK.
Challenges The Ukraine Conflict Will Bring
One way in which the Ukraine conflict impacts on small businesses is by driving up inflation. Already, before Russia invaded Ukraine, inflation in the UK was at a record high due to the pandemic. And the challenges ahead of small businesses have now become even more difficult.
Even before the conflict started, small businesses were faced with high inflation, rising energy cots and an increase in National Insurance Contributions (NIC) and National Living Wage (NLW), which will come into effect from April. And many businesses are still recovering from the impact the pandemic had, which will make the challenges ahead even more difficult.
One of the biggest impacts the Ukraine conflict had on the world economies so far, was the increase in gas and oil prices. This is because Russia is a big natural gas and oil producer and exporter. And while the UK only imports about 4% of it’s gas from Russia, Europe is heavily dependent on Russian gas, and any supply issues, will push up prices in Europe and the UK.
With Russia producing 12% of the world’s oil, the price of oil, both for energy and fuel, has increased as a result of the Ukraine conflict. These price increases will increase energy costs for small businesses even further.
But that’s not all, UK businesses are also likely to experience supply chain issues. Ukraine and Russia are some of the biggest wheat producers, and prices for bread and flour have already gone up due to the Ukraine conflict. And prices for commodities are likely to rise further, which will affect all sectors.
For example, the food and drink sector, which uses CO2 and aluminium for cans, will see price rises in these commodities. And other commodities needed by the food and drink industry are also likely to rise in price.
Past experience tells us that disruption to Ukraine’s exports will have an impact on global food supplies and on the price of a range of key commodities, such as vegetable oils and maize, which are important in U.K. food productionKaren Betts, Chief Executive of the Food and Drink Federation
Food production will also see supply chain issues and, with that, rising prices. Russia is one of the biggest fertiliser producer, producing two-thirds of the world’s ammonium nitrate fertiliser. Feeding livestock in the UK could become much more expensive, which will drive up meat prices.
All these issues, higher inflation, higher energy and commodities costs and supply chain issues, will have an effect on small UK businesses. While bigger businesses are able to absorb these higher costs more easily, smaller businesses, many who are still struggling with the effects of the pandemic, will not. And if they have to raise prices as a result, they will become less competitive.
Nick Allen from the British Meat Processors Association (BMPA) urges businesses to look at their supply chains and consider the impacts the Ukraine conflict might have on them.
How Consumer Behaviour Will Affect Small Businesses
Another challenge small businesses will face is the way consumer behaviour will be impacted by the Ukraine conflict. Higher energy costs, rising inflation and increasing costs of living are putting pressure on household budgets. As a result, it is likely that most people will adapt their spending behaviours and only spend money on vital things, such as food, energy bills, fuel and mortgage or rent payments.
The fear and uncertainty that such a conflict brings, will also make consumers more careful about how they spend their money. This means small businesses face the challenge of convincing their consumers to spend their money with them.
Because of rising costs, small businesses will have to raise their prices to keep their business financially viable. This will make it even more difficult to convince consumers to shop with them, especially, if big companies are able to absorb the costs.
So the cost of living crisis that has started as a consequence of the pandemic, is likely to get worse due to the Ukraine conflict. And this, in turn, will have an impact on small businesses and their ability to continue trading.