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Britain’s businesses have stopped hiring and slipped into “survival mode”, with economic output stuttering to a five-year low in June as the Iran war, weak consumer spending and relentless cost increases combine to squeeze firms from every direction.
The warning comes from consultancy BDO, whose index of economic output slid to 91.53 in June from 94.80 the previous month. That is its weakest reading since February 2021, when the UK was still in the grip of a Covid-19 lockdown.
For small business owners, the most sobering finding is on jobs. BDO’s research indicated that hiring appetite is close to a 15-year low, just as firms absorb the largest increase in operating costs in more than three years.
The price of energy, raw materials and other inputs crucial to goods production has risen sharply since the effective closure of the Strait of Hormuz, which followed the initial US-Israeli strikes on Iran at the end of February. Four months on, the downturn has become far more broad-based, with manufacturing and services both suffering a dismal June.
Scott Knight, head of growth at BDO, said: “Business confidence has remained low for 20 consecutive months as businesses are trapped in survival mode. Rebuilding confidence will need to be tackled immediately by the next prime minister if the UK is to return to growth.”
That next prime minister is Andy Burnham, who succeeds Sir Keir Starmer on July 20. The data suggests reviving a stalled economy will need to sit at the top of his in-tray from day one.
Official figures due this Thursday from the Office for National Statistics are expected to show gross domestic product expanded by just 0.1 per cent in May, having contracted by the same degree in April.
The geopolitical picture offers little comfort. Over the past week the US and Iran have traded strikes and President Trump declared the fragile ceasefire between the pair “over”, a move that has already pushed wholesale gas prices sharply higher. Brent crude briefly topped $80 a barrel before settling back at $75 by the end of the week.
The turbulence is feeding through to the cost of money. The yield on the benchmark ten-year UK government bond rose by around 0.10 percentage points to 4.87 per cent over the past five days, and higher gilt yields translate directly into dearer finance for firms refinancing loans, overdrafts and commercial mortgages.
BDO predicted that business confidence is likely to continue to falter thanks to heightened geopolitical tensions.
Analysts are split on whether the Bank of England will lift the base rate from its current 3.75 per cent this year, with markets having already swung towards pricing in a rise since the oil shock began.
Weakness in the labour market is seen as the main reason for the central bank to stay cautious, having left rates unchanged last month. The latest ONS figures showed vacancies dipped to a five-year low over the three months to May, while private sector pay, excluding bonuses, grew by 2.9 per cent, the smallest rise in more than five years.
For SME owners weighing hiring plans, borrowing decisions or energy contracts, the next fixed point in the calendar is July 30, when the Bank’s monetary policy committee meets again.
