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UK economy faces strong headwinds as firms face record high inflationary pressure

·3-min read
Uk economy
The UK eocnomy is facing a rough couple of months as a record high number of businesses cite inflationary pressure. Photo: Getty

UK's economy is facing "significant" headwinds as inflationary pressure pushes record number of firms to anticipate price rises and cash flows fail to recover from pandemic lows.

The British Chamber of Commerce (BCC) said on Friday that 62% of businesses expect their prices to rise in the next three months, a new historical high, up from and an increase from 58% in Q4. Just 1% of respondents expect a decrease in their prices.

Its Quarterly Economic Survey (QES) for the first quarter of this year shows inflationary pressures on firms reaching levels never previously recorded in its 33-year history, with 77% citing it as a main concern. This was up from 66% in the previous quarter.

When firms were asked what pressures they were facing to raise prices, 92% of manufacturers cited raw materials, 56% cited other overheads such as energy costs and transport costs, 34% cited pay settlements, and 19% cited finance costs.

"Our figures also highlight the significant headwinds facing the UK economy," said Suren Thiru, head of economics at the BCC. "Historically high price pressures suggests that the current inflationary surge will escalate significantly in the coming months."

He added: "The reversal of the hospitality VAT cut, the higher energy price cap and soaring energy and commodity prices amid Russia’s invasion of Ukraine, should lift inflation well above 8% in the near term."

The percentage citing interest rates as a concern also rose in the quarter, with 32% reporting interest rates as a concern, up from 27% in the final three months of 2021.

The BCC said that the Ukraine war has raised the risk of a renewed economic downturn by aggravating the financial squeeze on firms and households and disrupting the supply of commodities to key sectors.

Read more: UK economy grows more than expected but household savings drop

The survey of 5,627 firms also revealed a continuing stagnation in the proportion of companies reporting increased domestic sales and investment, while cashflow weakened slightly in Q1.

Indicators for both cash flow and investment have shown no sign of recovery since the start of the Covid-19 shutdown.

For firms overall, 28% reported an increase to cash flow, a drop from 31% in Q4. 26% reported a decrease, up from 23% in Q4.

Read more: Cost of living crisis: Everything that will cost you more in April

When it comes to business activity, 42% of respondents overall reported increased domestic sales in the first quarter, down from 45% in Q4. 18% reported a decrease, up from 16% the previous quarter.

In the services sector, the balance of firms reporting increased domestic sales dropped to 21% in Q1, down from 26% in the fourth quarter,

In the manufacturing sector, the balance of firms reporting increased domestic sales was 24% during first three months of 2022, up from 22% in the three months prior.

Shevaun Haviland, director general of the BCC said: "We need to be absolutely clear: this cost of doing business crisis is squeezing firms’ finances, driving further increases in prices and directly fuelling the cost-of-living crisis.

"The Spring Statement was a missed opportunity to ensure business have greater resilience to weather the uncertain and volatile times ahead.

Haviland urged the government to provide additional support "through the expansion" of the energy bills rebate scheme, to include small firms and energy intensive businesses.

She also called on chancellor Rishi Sunak to introduce an SME energy price cap to protect smaller firms from some of the price increases.

Watch: How does inflation affect interest rates?

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