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UK business optimism tanks as prices rise at their fastest pace in 40 years

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business
Business optimism fell at the sharpest pace since April 2020. Photo: Getty

Optimism amongst Britain's manufacturers has fallen at the sharpest pace since the first coronavirus lockdown in April 2020 as companies scramble to cover soaring raw material and energy costs.

Amid warnings that the war in Ukraine is exacerbating the pandemic-related supply crunch, the Confederation of British Industry (CBI) found firms ranging from food producers to car manufacturers suffered huge cost pressures in the first three months of 2022, with a further acceleration in price growth expected in the next quarter.

Domestic costs jumped by 60% in the quarter to April from 40% in January — the fastest rate since 1979. Meanwhile, demand eased and investment intentions weakened as firms plan to pass on the higher costs to consumers amid 30-year high inflation.

Read more: FTSE: McColl's shares nosedive 50% on funding warning

"Manufacturing orders and output continue to grow, albeit at slower rates. But the war in Ukraine is exacerbating the COVID-related supply crunch, with cost increases and concerns over the availability of raw materials at their highest since the mid-1970s," said Anna Leach, deputy chief economist at the CBI.

"It is little wonder that sentiment has deteriorated sharply over the past three months and manufacturers are now scaling back their investment plans."

Factors likely to limit export orders in the next three months. Chart: CBI
Factors likely to limit export orders in the next three months. Chart: CBI

The April industry gauge found that the balance of firms whose average costs increased — the number reporting a rise minus the number reporting a drop — stood at 87% last month. This was slightly below the record of 88 percentage points in July 1975, when UK inflation was running at more than 20%.

Meanwhile, the downward trend in manufacturing optimism continued in the first quarter, according to the CBI's quarterly industrial trends survey.

In March last year when the UK was emerging from the early 2021 lockdown, firms upbeat about the outlook outweighed those gloomy by a balance of 38%. In October that had dropped to 2% as supply chain shortages pushed up prices. The figure now stands at -34%, compared to -9% in January.

Average domestic prices. Chart: CBI
Average domestic prices. Chart: CBI

Samuel Tombs, UK economist at Pantheon Macroeconomics, said: "The employment and investment intentions balances also weakened in the second quarter, though they remained above their long-run averages.

"We think manufacturers are right to be relatively downbeat about the outlook and expect production to flatline over the rest of this year."

Read more: Household bills rise for 9 out of 10 UK adults, ONS survey finds

Leach called on the UK government to consider "near-term support measures" to help firms through the crisis.

"An immediate priority should be to provide cashflow support for those struggling with wholesale energy costs via the recovery loan scheme, while cutting bills for energy intensive industries can help maintain UK competitiveness," she added.

Watch: Why are gas prices rising?

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