UK risk of recession as firms buckle under soaring costs

UK households and firms are buckling under a soaring inflation rate, which is one of the fastest-growing in around 40 years. This is the state of play according to a respected survey of the ongoing performance of British companies.

One report suggests that UK firms are experiencing increases in operational expenses at a quicker rate since records began (1998). Simultaneously, export orders and growth expectations are at their lowest since May 2020.

Private sector growth slumps

A newly released report has provided insights into private sector growth and evidences the struggle that firms are facing amid soaring costs.

The report revealed that in May 2022, the S&P Global index of private sector growth took a massive slump. It hadn’t dropped to these figures since February the previous year, at which point the UK was in the midst of another COVID lockdown.

UK firms are seeing operating expenses rise at the fastest pace since records began in 1998, according to the survey, with services firms particularly feeling the pain. Meanwhile, export orders and expectations for future growth have both dropped to the lowest since May 2020.

The rapid decline in private sector growth is said to be the fourth biggest since records began and even worse than the declines experienced before the COVID pandemic arrived. The Great British Pound decreased by 0.7% after the release of the report.

The survey highlights the significant negative impact that increasing prices are having on the private sector and the wider economy. It’s also likely to apply pressure on the UK Government to do more to avoid a further period of soaring inflation. The Bank of England recently increased the base rate to 1.25% in attempts to kerb inflation. Yet, more may need to be done.

The survey shows that the dominant services sector is most affected by soaring costs. Business expectations in these industries are at their lowest since the start of the first COVID lockdown.

S&P states that its composite index for the UK economy dropped to 51.8 when leading economists forecasted 56.5. A composite index is a statistical tool to get an overall picture of how the economy is fairing. A rating above 50 means the economy is expanding, whereas a rating below 50 means the economy is contracting. We’re now close to a contracting UK economy.

So, will the UK enter a recession?

A recession is when two consecutive quarters record a fall in Gross Domestic Product (GDP). The UK is likely to record a decline in GDP in the second quarter of 2022, but despite the current issues and soaring inflation, we might still (artificially) avoid a recession.

This is because the Queen’s Jubilee provided us with an additional bank holiday in the second quarter which artificially reduces GDP and gives us a much better chance of avoiding a consecutive GDP decrease in the third quarter.

July 2022