Today’s geo-political tensions combined with Trump 2.0 driven economics mean that many small and medium-sized enterprises (SMEs) may find themselves caught in a multi-pronged squeeze – a perfect storm.
On one hand, higher tariffs imposed by the Trump administration could reduce export competitiveness and lower net exports.
On the other, rising employment costs through increases in the minimum wage and employers’ National Insurance are pushing up the cost of doing business.
Both factors can dampen overall economic growth and activity, making it crucial for SMEs to adjust their strategies.
Below, we look at the economics of these headwinds and outline practical steps to navigate the challenges.
The economics behind the potential headwinds
Economists use the term Aggregate Demand (AD) to help measure the general health of the economy. It calculates the total demand for goods and services in the economy, spending by Consumers, investment by Business, Government spending and net value of international trade (exports less imports).
When tariffs make UK goods more expensive abroad, exports drop reducing total demand.
Lower demand due to fewer exports mean less revenue for export-dependent firms, potentially leading to reduced production, wages, and investment in those sectors which can have a knock on throughout the economy.
Rising Employment costs and cost-push pressure
Changes to Minimum Wage and National Insurance increase the cost of each employee. These policies and the costs that they create can also put upward pressure on the price of goods and services.
Higher wage bills can reduce profit margins and dampen the incentive to produce. This leftward shift in what’s called the Short Run Aggregate Supply (SRAS) can bring about cost driven inflation, leading to higher prices at lower output levels (especially if businesses attempt to pass on cost increases to consumers which they will inevitably do)
Mixed Effects on Demand: While some people benefit from higher incomes, potentially boosting consumption businesses under cost pressure may limit hiring, reduce hours, or hold back on investments and spending.
Combined impact on economic activity
Weaker export demand, alongside higher production costs, can restrain the economy’s overall growth rate something which is already under pressure and forecast by the OBR to be less than 1% this year.
Businesses may delay expansion or innovation due to uncertainty about future costs and trade flows, further slowing growth.
Why SMEs must act: Building resilience amid headwinds
SMEs often lack the financial buffers or global diversification that larger firms can rely on. With cost pressures rising internally and revenue streams potentially shrinking (if exports or domestic sales waver), rapid, strategic action becomes essential.
Practical strategies for SMEs
Controlling Costs and Strengthening Cash Flow
- Operational Audits
Identify inefficiencies in production, delivery, or administration. Small process improvements can free up funds to offset higher wage bills.
- Smart Inventory and Supplier Management
Negotiate with suppliers for bulk discounts or better payment terms. Explore local or alternative suppliers to mitigate potential price shocks and reduce dependency on any single source.
- Cash Flow Forecasting
Update forecasts more frequently in uncertain conditions, weekly or monthly, to stay alert to potential shortfalls or late customer payments.
Differentiating Through Value and Customer Retention
- Refine the Value Proposition
When faced with cost pressures, some firms resort to price hikes. Instead, highlight quality, service, and reliability to justify your pricing and retain customer loyalty.
- Targeted Marketing
Tailor messaging to emphasise how your products or services solve immediate customer pain points, especially in a cost-conscious climate.
- Customer Relationship Management
Retaining customers is crucial. Incentivise loyalty and seek feedback on product or service improvements, ensuring you address their top concerns.
Investing in People Wisely
- Upskilling to Boost Productivity
As employment costs rise, each employee’s contribution becomes more critical. Training and development can help staff work smarter, offsetting higher wage expenses.
- Employee Engagement
Transparent communication about economic challenges can build trust, foster new ideas, and encourage problem-solving at all levels.
- Flexible Work Arrangements
Consider job-sharing or part-time models if demand fluctuates. This approach can preserve employee morale and help you maintain talent without large-scale layoffs.
Diversifying Revenue Streams
- Domestic Expansion
If exports are uncertain, look for domestic growth opportunities. Adapt offerings to appeal to new customer segments or regions.
2. New Products and Services
Leverage core capabilities to spin off complementary offerings. This can mitigate risk if a core product line sees declining demand.
3. Partnerships and Collaborations
Explore alliances with other SMEs or distributors to share costs and expand reach without bearing the entire investment alone.
4. Scenario Planning and Risk Management
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- Regular Scenario Testing
Model best-, moderate-, and worst-case outcomes for revenue, costs, and cash flow. This readiness helps guide quick decisions if the landscape shifts suddenly.
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- Financial Buffers
Maintain emergency funds or lines of credit. Market upheavals can turn even a short-term challenge into a solvency crisis for underprepared firms.
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- Continuous Monitoring
Keep an eye on emerging government support programs—grants, tax relief, or favourable loans and changes in trade policy that could affect tariffs.
The long game: Positioning for recovery
While tariffs, rising employment costs, and slower growth may persist for some time, economic cycles do eventually turn.
Those SMEs that focus on building efficient operations, nurturing customer relationships, and investing in their teams are likely to be best placed to capture new opportunities when confidence and demand recover.
By embedding resilience into everyday processes, you not only navigate current headwinds but also lay a strong foundation for sustainable growth in the future.
Final thoughts
The overlapping pressures of tariffs and employment cost increases can strain margins and dampen overall economic activity.
However, proactive strategies from tight cost control and smart financing to prioritising staff development can help SMEs stay competitive and poised for renewal when the broader economic picture brightens.
By understanding the economic underpinnings and acting decisively, SMEs can turn a tough climate into an opportunity to refine operations and emerge stronger in the long run.