Business confidence recovery since early this year comes to ‘shocking halt’ as continued inflation and rising interest rates bite
A recovery in business confidence since the start of this year has come to a ‘shocking halt’ due to continued inflation and skyrocketing interest rates.
Confidence fell to its lowest level since December in June, according to a survey of bosses by the Institute of Directors (IoD).
Sentiment was improving after a rough patch after Liz Truss’ disastrous mini-budget last fall – and a separate Lloyds Bank survey yesterday pointed to an uptick in early June.
But since then, storm clouds have been gathering and inflation is proving difficult to contain, driving up interest rates and clouding growth prospects.
Some fear the Bank of England’s slow response to inflation and flawed forecasts mean it will have to raise interest rates so much that a recession becomes inevitable.
Feel the heat: Thunderclouds are gathering and inflation is proving difficult to change
The IoD business confidence survey of 834 corporate executives, conducted in the latter part of the month, showed a reading of minus -31, down from minus -6 in May, offsetting improvements since the start of the year.
Kitty Ussher, the chief economist of the IoD, said: “The wave of optimism and investment plans we’ve seen in recent months came to a shocking halt.
Business leaders took stock of worse-than-expected inflation data and what that means for interest rates and the outlook for the economy in general. As business confidence in the economy plummets, many investment plans that were only recently dusted off are now being put on hold as leaders question whether the overall business climate is now too risky to consider expansion.”
Of the leaders who were pessimistic, 33 percent cited inflation, while 19 percent pointed to declining customer demand.
The research comes after official figures confirmed yesterday that the economy grew only 0.1 percent in the first quarter. It means Britain is outperforming earlier gloomy recession forecasts, but the underlying data paints a more worrying picture.
The figures from the Office for National Statistics (ONS) suggested that customers were saving as the cost of living became tight. And they showed that, taking inflation into account, household disposable income fell by 0.8 percent in the first quarter.
It was the fifth time of the last six quarters that purchasing power fell.
The investment picture was more favorable, with growth of 3.3 percent, although the ONS said this could be because companies put forward plans to take advantage of a “super deduction” tax break that expired at the end of March.
Separately, Nationwide’s home price numbers showed a 3.5 percent year-on-year decline — the biggest since 2009 — as the lender warned that higher interest rates were likely to hurt the market.
The gloom comes after figures from last week showed that inflation in May stalled at 8.7 percent. Worryingly, so-called ‘core inflation’, which excludes volatile factors such as energy and food, actually went the wrong way, rising to 7.1 percent.
This prompted the Bank of England to raise interest rates by half a percentage point to 5 percent a day later.
Markets are betting that they will reach 6.25 percent in the coming months.
The bank has come under fire for failing to keep up with the price spiral, with Lloyds of London chairman Bruce Carnegie-Brow saying this week that he had “seriously underestimated” the threat of inflation.
Lord Lamont, the former Conservative chancellor, has said his credibility is ‘at stake’.