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7:34 am | August 7, 2023

UK business confidence falls as economy slows and interest rates rise

Firms have cut back on hiring staff and manufacturing output is at its lowest since May 2020 as supply issues continue and interest rates rise, a survey finds

On Thursday, the Bank of England raised interest rates to their highest level in 15 years. Photograph: Jordan Pettitt
On Thursday, the Bank of England raised interest rates to their highest level in 15 years. Photograph: Jordan Pettitt

Optimism has declined, with higher interest rates 

Business confidence fell last month amid jitters over the slowing UK economy, interest rates of the UK rise, dampening company plans to hire more staff, according to a survey of more than 4,000 firms.

Optimism has declined, with higher interest rates and weak global demand contributing to gloom across the services and manufacturing sectors.

The latest Business Trends report from accounting firm BDO showed that employers’ hiring intentions have dropped for the first time in six months.

It also showed manufacturing output fell to its lowest point since the early days of the UK Covid-19 lockdown, in May 2020, with continuing supply difficulties taking a toll.

China’s faltering recovery and a weak forecast for growth in the eurozone have contributed to the difficulties faced by UK exporters, which missed out on much of the boom in trade coming out of the Covid-19 pandemic.

Prediction of future interest rates

Economists have forecast a global slowdown in the second half of this year in response to higher borrowing costs imposed by the Bank of England, the US Federal Reserve, and the European Central Bank.

The report, a poll of polls across leading business and manufacturing pulse checks, underlines the economic headwinds, as the Bank of England raised interest rates to their highest level in 15 years on Thursday with hints of more to come to rein in inflation.

In response to the higher costs of borrowing, businesses have cut back on hiring, with the number of vacancies falling by 85,000, and slower rates of pay growth. The report found businesses were more pessimistic about the future, driven by negative sentiment among manufacturers exposed to higher borrowing costs.

BDO said its results showed manufacturing was likely to contract further, although the outlook in services indicated marginal growth, before a looming recession at the turn of the year.

How did people think about UK’s interest rates

Kaley Crossthwaite, a partner at BDO, said: “A more pessimistic outlook from businesses and consequent loosening of the labor market are the first indicators of the slowing economic growth expected towards the end of the year.

“With yet another hike in interest rates from the Bank of England last week, this downturn is only set to worsen in what should be a golden quarter for many, if more isn’t done to support businesses.

“To reverse these trends, government needs to work more closely with industry to ensure firms of all sizes have tailored support in order to weather the storm, invest and grow.”

Optimistic side

One small silver lining reported was another drop in input price inflation, reflecting falls in global commodity markets, as BDO’s inflation index fell to its lowest reading in more than two years.

The Bank of England said last week that a sharp decline in the cost of raw materials and imported goods had yet to feed through into the consumer prices index, which remains one of the highest among the leading industrialised economies.

UK consumer inflation dipped to 7.9% in June, down from 8.7% the previous month. Average wage rises were 7.7%, according to the latest labour market data.

The Bank expects the economy to expand slightly over the next three years, although it expects total growth will only just top 1%.


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