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UK business activity slows down as costs increase

UK businesses are facing declining activity due to high energy costs, rising interest rates, and declining demand, increasing the risk of a recession, according to analysts.

In December, business activity contracted at its fastest pace in two years, as the high cost of living impacted household spending and companies cut their investments. The services sector, which makes up about 75% of private sector output, experienced its largest decline since the second Covid-19 lockdown.

The S&P Global/Cips flash purchasing managers’ index, which reflects responses from 80% of the services and manufacturing sectors, showed a reading of 47.8 in December, lower than the level expected by economists and indicating a contraction in activity. Chris Williamson, the chief business economist at S&P Global Market Intelligence, stated that various factors including staff shortages, industrial disputes, rising cost of living, and higher interest rates are contributing to the UK’s economic decline.

Economists predict a recession for the UK in the first half of 2023, followed by a modest recovery later in the year. Inflation, which has remained above 9% since April 2022 (and is currently 10.5% – well above the Bank’s 2% target), is forecast to decline before the end of 2023, reducing the pressure on the Bank of England to raise its base rate.

Businesses reported increased optimism for the future, with improved expectations for the year ahead, driven by hopes for a better global economy and lower domestic inflationary pressures. They also reported hiking their prices to cover the rising cost of raw materials, energy costs, and staff wages.

Overall, this is a disappointing start to the year for businesses in the UK, reflecting not only short-term challenges such as energy cost increases and industrial disputes, but also highlighting longer-term structural issues like labour shortages and trade difficulties related to Brexit.

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