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Uncertainty about whether the UK economy will tip into a recession caused by sky high inflation and the Bank of England hiking interest rates aggressively to tame it is keeping businesses grounded, a new survey out today shows.
A five straight month upward rise in optimism among leaders of Britain’s biggest firms was arrested in May due to concerns about the trajectory of the UK economy.
Nearly two in five directors are pessimistic about the economy’s fortunes over the next year, compared to around a third being bullish, according to the Institute of Directors’ (IoD).
Lingering anxieties about the strength of output over the coming year amid steeper interest rates and ongoing elevated inflation pushed overall confidence down to minus six points in May from minus five points in the previous month.
The reading though marks a huge swing from businesses being terrified about the damage higher debt rates and a tanking pound could have on the economy during the Liz Truss premiership.
The lobby group’s index slumped to minus 64 points in November 2022 as the country was still being gripped by the financial market chaos caused by Truss’s ill-fated mini-budget.
Britain’s economy has smashed expectations so far this year by avoiding a recession. Bank of England, International Monetary Fund and Office for Budget Responsibility economists had all said the country would suffer a recession in 2023. All three have now changed their thinking on this.
Kitty Ussher, chief economist at the IoD, said: “Confidence improved in the first few months of the year as business leaders began to believe that the outlook for the UK economy, although difficult, was not as bad as they had previously been led to believe.”
“Our confidence index is now stabilising at a just-below neutral stance, similar to that recorded before the invasion of Ukraine,” she added.
However, a much tougher than expected inflation problem threatens to keep the UK on the edge of a recession for most of this year.
Numbers out from the Office for National Statistics last week revealed the rate of price increases dropped by less than predicted to 8.7 per cent from 10.1 per cent. Core inflation surprisingly rose to 6.8 per cent from 6.2 per cent.
As a result, economists at Goldman Sachs, Deutsche Bank and Nomura have predicted the Bank of England will have to hike interest rates to 5.25 per cent. Financial markets think peak rates will be higher at 5.5 per cent.
Such an upward move would heap yet more misery on businesses and families. Bank Governor Andrew Bailey and co have already hiked rates twelve times in a row.
Nearly a third of the 1,026 business leaders the IoD surveyed reckon inflation has peaked. Goldman Sachs warned earlier this week it won’t fall back to the Bank’s two per cent target until at least 2026.
A net positive 36.4 per cent of companies intend to raise staffing levels this year and a net positive 21.5 per cent of directors think they’ll step up business investment over the next 12 months.