Britain's businesses have stopped hiring and slipped into "survival mode," with economic output stuttering to a five-year low in June. The downturn is attributed to a combination of factors, including the Iran war, weak consumer spending, and relentless cost increases. This challenging environment is squeezing firms from every direction.
The latest index of economic output has slid to 91.53 in June from 94.80 the previous month, marking its weakest reading since February 2021. This significant decline indicates a substantial slowdown in economic activity. The current situation is the most challenging for businesses since the UK was in the grip of a Covid-19 lockdown.
A particularly concerning finding for small business owners is the sharp decline in hiring appetite, which is close to a 15-year low. This decrease in hiring comes at a time when firms are absorbing the largest increase in operating costs in more than three years. The rising costs of energy, raw materials, and other essential inputs are crucial to goods production.
The price increases are largely attributed to the effective closure of the Strait of Hormuz, which occurred after the initial US-Israeli strikes on Iran at the end of February. The subsequent downturn has become far more broad-based, with both manufacturing and services suffering a dismal June. This widespread decline in economic activity is a cause for concern.
Business confidence has remained low for 20 consecutive months, with firms trapped in survival mode. To return to growth, rebuilding confidence needs to be addressed immediately by policymakers. The next prime minister will face significant challenges in reviving the stalled economy.
Economic data is expected to show that gross domestic product expanded by just 0.1 percent in May, following a contraction of the same degree in April. The geopolitical picture offers little comfort, with ongoing tensions between the US and Iran contributing to economic uncertainty.
The recent developments have led to an increase in the cost of money, with the yield on the benchmark ten-year UK government bond rising by around 0.10 percentage points to 4.87 percent. Higher gilt yields translate directly into dearer finance for firms refinancing loans, overdrafts, and commercial mortgages.
Analysts are divided on whether the central bank will lift the base rate from its current 3.75 percent this year. The labor market's weakness is seen as a primary reason for the central bank to remain cautious. The latest figures showed vacancies dipped to a five-year low, while private sector pay growth slowed significantly.
For small business owners, the next fixed point in the calendar is July 30, when the monetary policy committee meets again. At this meeting, key decisions on interest rates and economic policy will be made, which could have a significant impact on businesses and the broader economy.
