At the end of last year the UK was forecast to enter recession this year, and while it’s not yet been confirmed if this will happen, the economic climate undoubtedly remains challenging for businesses.

The IOE&IT Daily Update here looks at five recent data reports that continue to paint a difficult picture for UK businesses.

1: Mixed PMI data

British business economic activity fell at its fastest rate in two years in January with businesses blaming high interest rates, strikes and weak consumer demand.

The S&P Global/CIPS flash composite Purchasing Managers’ Index (PMI) dropped to 47.8 from 49.0 in December, hinting at the risk of recession. Any score below 50 indicates a contraction.

“Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession,” said S&P Global’s chief business economist, Chris Williamson.

UK data was in stark contrast to PMI readings from other European countries which showed that eurozone activity returned to growth in January for the first time since June 2022, reports CNBC.

However, PMI data showed that business expectations for the year ahead improved considerably in January, with hopes of a better global economic backdrop and lower domestic inflation boosting business optimism after its October low-point, reports the FT.

“Optimism among private sector firms was the best for eight months signalling the downturn may not be as long and protracted as feared,” said John Glen, CIPS chief economist.

2: SME pessimism

Confidence among the UK’s small business owners plunged to its lowest level seen since the second Covid-19 lockdown late last year, according to Federation of Small Businesses (FSB) research. 

The Small Business Index headline confidence figure in the final quarter of 2022 fell to -46 points, down from -36 points in the third quarter, reports This is Money.

SMEs are being weighed down by high costs, surging utility bills, and supply chain delays and delivery woes, with 44% expecting to see a fall in revenues in the coming months, while only 29% expecting an increase. 

A survey by the Institute of Chartered Accountants in England and Wales (ICAEW) showed business confidence in Scotland has also fallen to its lowest recorded point for 14 years, reports the Herald.

A separate study, the Addleshaw Goddard Scottish business monitor report, shows that around 90% of businesses have seen their costs increase over the past year, many by more than 50%.

3: Shoppers squeezed

British retail sales volumes slid over the last month at the fastest rate since April last year, as shoppers trimmed their sails with the cost of living crisis deepening.

The Confederation of British Industry’s (CBI) sales balance, which included a couple of days of the Christmas trading period, fell to -23 from +11 in December’s report, with more store chains showing a drop in retail sales than a rise, reports Reuters. The survey pointed to another drop in retail sales next month.

“Retailers began the new year with a return to falling sales volumes, as the sector continues to face the twin headwinds of rising costs and squeezed household incomes,” said CBI’s Martin Sartorius.

4: Business ‘on a cliff edge’

Businesses are starting 2023 at a really weak point financially, as conditions go from “bad to worse”, according to ICAEW.

Swelling costs are squeezing margins, forcing businesses to cut back production; higher prices are also eroding consumers’ incomes, knocking spending. These factors are squeezing output, pushing business confidence to -23.4, the lowest reading since 2009, reports City AM.

Suren Thiru, director of economics at the ICAEW, told the Telegraph that a 6% point increase in corporation tax in April and less energy help from the government means many companies are facing a “cliff edge” as consumers tighten their belts and the economy slows.

5: EY downgrades forecast

A gloomy forecast from business consultancy EY warns that the UK’s impending recession could be twice as bad as previously thought.

With sentiment at the recent World Economic Forum in Davos suggesting the global outlook was not quite as grim as first feared, EY has taken a counterview in an update to a previous forecast, reports the Guardian.

Its October Item Club had predicted a 0.3% contraction in gross domestic product (GDP) this year, followed by 2.4% growth next year and a 2.3% rise in 2025.

The update now predicts GDP will drop 0.7% this year, followed by lower growth of 1.9% and 2.2% over the next two years, based on reduced government support, higher taxes and an overall worsening outlook.

One “silver lining” is that despite being a deeper recession than forecast, it won’t necessarily be a longer one, said Hywel Ball, EY’s UK chair.