Even pre-Covid-19, setting up and running a small business wasn’t easy. Now it’s even more challenging. But while the current crisis is far from over, Europe is beginning to reopen cautiously and return to some form of normality.
However, many more challenges lie ahead in the wake of the pandemic, not least of all the prospect of a pan-European recession. Here, we take a look at the economic landscape for small businesses over the short to medium term.
Creating a perfect storm for SMEs
While Covid-19 is an unprecedented disaster for businesses, it’s important to highlight that economic growth in Europe was already falling before the crisis hit. We were already potentially heading for a downturn with the IMF downgrading forecasts for 2019 from 3.7% to 3.3%. External factors are all still playing their role. The trade war between the US and China was, and still is, severely affecting global growth prospects for European businesses and has created a fall in external demand for EU goods. Relations between the two superpowers are at historic low and the situation is likely to deteriorate further.
That said, this trade war could potentially create opportunities too. The competitiveness of Chinese and US firms is suffering and EU exporters could benefit. The EU was a key player in the Trans-Pacific Partnership (TPP) strengthening trade links with countries in the Asia-Pacific region. President Trump pulled the US out of this agreement immediately upon taking office, leaving the path clear for the other remaining countries to cement the agreement now known as the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). At least five other Asian economies (Taiwan, Indonesia, Korea, Philippines and Thailand) have expressed an interest in joining the initiative and even China is studying the possibility of membership. This could see the EU doing much more business with its APAC neighbours
Brexit is drawing closer
Of course, behind the scenes, Brexit is still there. The UK has already left the EU and the deadline for Brexit transition on the 1st January 2021 is creeping ever closer. On this date the rules for importing and exporting goods to the UK will change. However, as the negotiations are still ongoing, what those new rules might entail is anyone’s guess.
This continued uncertainty continues to weigh heavily on businesses throughout Europe, and the UK. It’s hard to predict how the relationship between European businesses and their UK partners will change after January 2021. Currency volatility, as well as tariffs, will have a big impact on how much business is still done between European companies and their UK partners. A decline in Sterling, for example, will make exports to the UK more expensive for customers there and directly affect European competitiveness.
Financing small businesses
Interest rates are set to stay the same (or even fall further in the event of a recession) as inflation remains low. While, theoretically, this should mean lower interest payments for companies that borrow to invest in the business, many SMEs have reported difficulties in securing finance. This has been a long-running problem for small businesses in Europe with many stating that traditional banks are inflexible and bureaucratic. Given a potential recession in the aftermath of Covid-19, this is not likely to improve as banks and other lenders become more reluctant to lend.
However, with around €65 billion in funding for small business, the European Regional Development Fund could be a big help to struggling SMEs, helping firms access finance, as well as advice and networking opportunities – all of which will be necessary in order to expand into new markets, especially overseas.
Besides this, many companies will be looking for more help from state authorities in terms of tax breaks and other financial supports to kick-start their businesses as they emerge from lockdown. Most states are already doing something. After all, these companies represent 99% of all businesses in the EU and are hugely important in powering local economies.
Do more with digital
Digitisation will continue to be important in cutting costs and driving efficiencies. Just as SMEs have turned to Fintech companies, such as KoalaPays, to help them be more agile and reduce their dependency on traditional banks, technologies such as Big Data, AI and Cloud Computing applications will provide new solutions to help these companies thrive in what could be a very difficult economic environment. Those that can make the best use of new technologies and online platforms will see the benefits in terms of lower costs, increased efficiencies and improved service for their customers.
Small and medium sized businesses are vital for the European economy and play a big role in employment in their own local markets, accounting for more than two-thirds of private sector jobs. Our economy cannot survive without them. Given their importance in our communities, with state help, technological innovation and networking, despite the challenges ahead, European SMEs should continue to succeed on the global stage.