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Services sector doing well despite warnings of restaurant closures in 2017

Latest figures show that the UK’s services sector continued to strengthen in November according to the HIS Markit/CIPS purchasing managers’ index.  The sector rose from 54.5 in October to 55.2 in November, this is the highest figure for the sector since January this year. Any figure above 50 usually indicates that the sector in question is growing.

As a result, the services sector has been described as ‘remaining on a firm growth path’ despite the uncertainty in Britain due to Brexit. This is good news for the UK economy as the services sector accounts for 80% of it; this news combined with surveys of the construction and manufacturing sectors points to a 0.5% growth for the last three months of the year according to HIS Markit.

As the services sector continues to grow, employment has also grown in this sector reaching its fastest pace since April. However, this news comes as business expectations for the next 12 months have weakened which is being put down to ‘ongoing uncertainty and inflationary pressures’.

As the value of sterling has fallen, it has pushed up the price of imported goods including the price of food that we import. The UK currently imports 48% of its food so many restaurants based here rely quite heavily on food and wine imports.

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With the cost of importing ingredients now higher and the increase in the cost of labour, due to the national minimum wage rise in April, many restaurants are thought to struggle come 2017. Accountancy firm, Moore Stephens, recently warned that thousands of restaurant businesses in Britain could fall into insolvency as a result of the above factors.

They say that 5570 restaurant businesses have at least a 30% chance of insolvency in the next three years as a result of inflation and stagnating disposable incomes. The restaurant sector is fiercely competitive and with so much choice, when diners do venture out for a meal the restaurant needs to do something to entice the customer into their establishment.

Many of the chain restaurants are reluctant to pass on growing costs to their customers in the form of price rises but this creates a problem of smaller profit margins to buffer any lost profit, increase in costs or drop in sterling. However small and medium sized businesses operate on tighter budgets so they are likely to either lose money or raise prices which could result in a loss of custom.

These tight margins and fragile finances show just how big the threat of insolvency will be in this sector. Mike Finch, restructuring partner at Moore Stephens, spoke to The Guardian regarding this issue; “There may be further challenges to come as the UK’s trading agreements with Europe remain uncertain. Many in the restaurant industry would consider the idea of additional import tariffs on foodstuffs with horror.”

Although things seem good for the services industry at the moment, when you look at the current figures, it seems like 2017 will be a tough year for many restaurants whether big, small or medium-sized. With the services sector being so important to the UK economy, a high number of insolvencies in the sector could negatively impact the UK’s economy and GDP for the next year.

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