Slowing business activity strengthens UK recession risk

Swelling costs and fears over rampant inflation forcing consumers to slash spending are eroding British businesses’ optimism, casting doubt over whether the country can avoid a recession, two surveys published today reveal.

Households are cutting discretionary purchases in response to living costs climbing at the quickest pace in four decades, research by the Confederation of British Industry (CBI) has found.

Business volumes among consumer services firms were flat over the three months to May, down from a 10 per cent rise in the previous quarter and are expected to slow in the coming months.

Higher staffing costs, energy prices as a result of the Russia-Ukraine war and logistics bills resulted in services businesses’ profitability dropping to minus 21 per cent. Profits are forecast to decline nearly 50 per cent in the next three months.

Experts have warned the UK could tip into recession due to a historic cost of living crunch prompting consumers to rein in spending.

The economy unexpectedly shrank 0.1 per cent in March, indicating Britain could be in the teeth of a reversal right now.

Inflation is already running at nine per cent, its highest level since 1982, but is projected to top 10 per cent after the summer.

The energy watchdog said earlier this week the cap on bills will jump another £800 in October, lifting the average bill 119 per cent in just a year to £2,800 and eating even further into household budgets.

The Bank of England has lifted interest rates from a record low of 0.1 per cent to a 13-year high of one per cent in the space of around six months to tame inflation, heaping pressure on firms’ bottom lines.

The Bank’s chief economist, Huw Pill, said yesterday “there is more that needs to be done” to return monetary policy back to a normal setting after years of ultra-low interest rates since the financial crisis.

Prices rose at the quickest pace since the CBI started tracking the data in 2006 in the consumer services sector last quarter as firms pass on higher costs to protect margins.

“Services firms are feeling pretty despondent about their immediate prospects in the face of cost pressures and high inflation. The squeeze on household incomes is already having an impact on activity in consumer services, with fears of worse to come over the summer,” Ben Jones, lead economist at the CBI, said.

Separate research published by the Institute of Chartered Accountants in England and Wales (ICAEW) found business confidence dropped to 18.6 last quarter, down from a peak of 47 three quarters ago.

Staff shortages hamstringing firms’ capacity to maintain production drove optimism lower. A large proportion of Brits have dropped out of the jobs market.

High demand for workers is rubbing up against lower supply, putting upward pressure on wages.

Staff are demanding pay rises to shield their living standards, while businesses are raising wages to fend off competitors from poaching talent.

“Staff turnover and skills availability, combined with high inflation, drove businesses to raise salaries to their highest point in 10 years,” ICAEW said.

However, regular pay is failing to keep up with price rises, clouding the overall demand outlook in the UK.