Uncertainty about whether the UK economy will head into recession caused by soaring inflation and the Bank of England aggressively raising interest rates to tame it is keeping businesses on a firm footing, a new survey released today showed.
A five-month rise in optimism among leaders of Britain’s largest companies was captured in May on concerns about the trajectory of the British economy.
Nearly two in five managers are pessimistic about the economy’s fortunes over the next year, compared with about a third upwards, according to the Institute of Directors (IoD).
Persistent concerns about the strength of production over the next year amid rising interest rates and persistently high inflation saw overall confidence drop to -6 in May from -5 in the previous month.
Although the reading indicates a large swing from companies who are terrified of the damage to the economy due to high debt rates and the drop in sterling during Liz Truss’ premiership.
The Lobby Group’s index fell to minus 64 in November 2022 as the country was still reeling from the financial market chaos caused by Truss’ ill-fated mini budget.
The British economy has dashed expectations this year so far by avoiding a recession. Economists at the Bank of England, the International Monetary Fund and the Office for Budget Responsibility have said the country will suffer a recession in 2023. Now the three have changed their thinking on the matter.
Kitty Usher, chief economist at 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, while difficult, was not as bad as they had previously been led to believe.”
She added, “Our confidence index is now stabilizing at a level just below the neutral position, similar to that recorded before the invasion of Ukraine.”
However, a tougher-than-expected inflation problem threatens to keep the UK on the brink of recession for most of this year.
Figures released by the Office for National Statistics last week revealed that the rate of price increases fell less than expected to 8.7 per cent from 10.1 per cent. Core inflation surprisingly rose to 6.8 percent from 6.2 percent.
As a result, economists at Goldman Sachs, Deutsche Bank and Nomura predicted that the Bank of England would have to raise interest rates to 5.25 percent. Financial markets believe peak rates will be higher at 5.5 percent.
Such an upward move would heap more misery on businesses and families. Bank Governor Andrew Bailey and his colleagues have raised interest rates twelve times in a row.
Almost a third of the 1,026 business leaders surveyed by IoD have peaked inflation. Goldman Sachs warned earlier this week that it would not back down from the bank’s 2 percent target until at least 2026.
36.4 percent of net positive managers intend to raise staffing levels this year, and 21.5 percent of net positive managers believe they will boost business investment in the next 12 months.