Company directors fear the cost of living crisis and tumbling consumer confidence will cause greater harm than previously estimated, increasing the risk of an economic downturn this year, according to a major new study.
The Institute of Directors (IoD) said in a survey last month that a lack of confidence in the economic outlook was “the number one issue” facing British businesses as inflationary pressures combined with the uncertainty caused by the Russian invasion of Ukraine to heighten the risk of a recession.
A measure of business-leader optimism in the economy, the directors’ economic confidence index fell to -36 in April from -4 in February.
City analysts and economists have become increasingly concerned that the UK’s rebound from the pandemic is quickly running out of steam following steep rises in the price of gas, electricity, petrol and food.
Shortages of staff across industries such as IT, manufacturing, construction and hospitality are also forcing employers to pay signing-on fees, bonuses and higher wages to secure employees with the necessary skills.
The Bank of England is expected to increase interest rates this week in response to a jump in inflation to 7% in March, adding further pressure on indebted businesses and households that rely on credit to make ends meet.
Officials at the central bank will publish their latest forecasts for the economy, which are likely to show it contracting in the second quarter in response to a decline in household spending power.
A separate study by the consultants EY-Parthenon revealed the number of profit warnings issued by UK-listed companies soared by 44% year on year in the first quarter of 2022, with a record number of firms citing rising costs for the weaker performance.
The report found that UK-listed companies issued 72 warnings in the first three months of 2022 – the highest quarterly figure since the start of the pandemic. A record-breaking 43% of warnings was due to rising costs, up from 27% in Q4 2021 and well above the 2011-21 average of 10%.
Alan Hudson, a partner at the firm, said: “Inflationary pressures, which had been building throughout 2021, were already putting pressure on company margins and consumers’ real incomes.
“The war in Ukraine has contributed to greater supply-side pressures and raised questions about confidence and demand in 2022. We are now looking at a year with ongoing Covid-19 disruption alongside higher inflation, greater uncertainty and faster monetary tightening than we expected just a few months ago.”
Kitty Ussher, chief economist at the IoD, said the invasion of Ukraine had “sent shock waves around British boardrooms”.
She said some businesses were beginning to plan and consider new investments, but “optimism in the UK economy itself remains very low and is now the number one issue seen as having a negative impact on businesses, even above the other very real pressures of high energy costs, difficulties in the labour market and problems with international supply chains”.