UK Economy Faces Downturn as Business Confidence Plummets with Interest Rate Hike

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UK (Parliament Politic Magazine) – According to a survey of over 4,000 firms, business confidence took a hit last month due to concerns about the sluggish UK economy, resulting in a dampening effect on companies’ plans to expand their workforce.

Optimism has declined as a result of higher interest rates and weak global demand, casting a shadow over both the services and manufacturing sectors. The most recent Business Trends report from accounting firm BDO reveals that employers’ intentions to hire have experienced a drop for the first time in six months.

Report Highlights Manufacturing Output

Furthermore, the report highlights that manufacturing output has reached its lowest point since the early days of the UK Covid-19 lockdown in May 2020, primarily due to ongoing supply difficulties.

The challenges faced by UK exporters can be attributed to China’s faltering recovery and a bleak growth forecast for the eurozone. As a result, UK exporters missed out on much of the trade boom that emerged from the Covid-19 pandemic.

Economists are predicting a global slowdown in the second half of this year due to increased borrowing costs imposed by the Bank of England, the US Federal Reserve, and the European Central Bank.

This report, which combines data from leading business and manufacturing surveys, highlights the economic challenges ahead. The Bank of England recently raised interest rates to their highest level in 15 years, signaling a potential need for further increases to control inflation.

Higher Borrowing Costs Have Made Business Owners Worried 

As a result of these higher borrowing costs, businesses have scaled back on hiring, leading to a decrease of 85,000 job vacancies and slower wage growth. The report also reveals a growing pessimism among businesses, particularly manufacturers who are feeling the impact of higher borrowing costs.

BDO, the organization behind the report, suggests that manufacturing is likely to contract further, while the services sector may experience marginal growth before a potential recession in the coming year.

Kaley Crossthwaite, a partner at BDO, explains, “The more negative outlook from businesses and the subsequent loosening of the labor market are the first signs of the anticipated economic slowdown towards the end of the year.”

“With the recent increase in interest rates by the Bank of England, the current economic downturn is predicted to worsen, especially during what should be a prosperous quarter for many businesses. 

Governement To Collaborate With Business Industry 

In order to mitigate these negative trends, it is crucial for the government to collaborate closely with the industry and provide tailored support to businesses of all sizes, enabling them to withstand the challenges, invest, and thrive.

Amidst these challenging circumstances, there is a glimmer of hope as input price inflation has decreased, reflecting the decline in global commodity markets. BDO’s inflation index has reached its lowest point in over two years, offering a small silver lining.

However, the Bank of England has noted that the decrease in the cost of raw materials and imported goods has not yet translated into a decline in the consumer prices index, which remains one of the highest among leading industrialized economies.

In June, UK consumer inflation dropped to 7.9%, down from the previous month’s 8.7%. Meanwhile, average wage increases stood at 7.7%, as per the latest labor market data.

Although the Bank anticipates a slight expansion in the economy over the next three years, it predicts that overall growth will barely surpass 1%.”

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Property Companies Showing Least Optimism 

Property companies are showing the least optimism in the face of ongoing economic uncertainty, as record surges in inflation rates raise concerns. However, businesses across various sectors anticipate a potential easing of input price inflation in the coming year, according to the Business Confidence Monitor (BCM) for Q2 by the Institute of Chartered Accountants in England and Wales (ICAEW).

The quarterly study, which surveys 1,000 chartered accountants across the UK, reported a confidence index of 6.1 for Q2 2023. This marks a significant improvement from Q1’s score of 2.5, but it still falls below the pre-pandemic average of 7.2 for the years 2010 to 2019.

ICAEW Chief Executive Michael Izza acknowledges the current challenges faced by businesses, including high inflation and successive interest rate rises, which have had a significant impact on business confidence. He states, “The drop-off in optimism during the survey period reflects the problems that our members have shared with us.”

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.