UK Economy: Growth Falters, Inflation Rises – Practical Takeaways for Business Owners

Business owners across the UK are facing an increasingly complex economic picture. Inflation has crept up again and recent figures show the economy has contracted for two months in a row. So, what’s really going on - and what should you be doing as a business owner?

Inflation rises again

The latest figures from the Office for National Statistics show inflation rose to 3.6% in the year to June, up from 3.4% in May. This is the sharpest increase since January 2024 and was driven mainly by rising motor fuel and food prices. Food price inflation has increased for the third consecutive month.

The Bank of England expects inflation to peak around 3.7% in the summer before easing towards its 2% target later in the year. But for now, rising prices are continuing to put pressure on households and businesses alike.

Economic growth faltering

The economy shrank by 0.1% in May, following a 0.1% fall in April. These figures were worse than expected and are mainly down to a drop in manufacturing and weak retail sales. While the economy saw strong growth earlier in the year, that now looks like a temporary boost - partly due to changes in US tariffs and the end of the UK stamp duty break.

Although the economy isn’t technically in recession, it is clearly struggling. Business confidence and activity in some sectors remain fragile, and growth may be modest in the months ahead.

Interest rate cuts on the horizon

There may be some relief ahead in the form of lower interest rates. Bank of England governor Andrew Bailey has said he believes the path for rates is “downward”, and many economists expect a rate cut at the next review in August.

Rates currently sit at 4.25%. A rate cut would reduce the cost of borrowing and could help ease pressure on mortgages, loans and credit. The Bank is being cautious because inflation is above target. However, Mr Bailey indicated that if the job market is showing signs of cooling down the Bank will be prepared to make cuts.

There are signs of that happening. The number of job vacancies has fallen to its lowest level since 2021, and more people are now available for work.

Many employers are struggling to absorb increased payroll costs due to the government’s recent increase in National Insurance for employers as well as the National Living Wage. As an example, National Trust cited these as reasons for its plan to cut 550 jobs from its payroll over the next few weeks. 

What are the takeaways for your business

Here are some key takeaways and practical tips for navigating the current climate:

1.   Keep an eye on costs: With inflation on the rise again, review your costs - especially around fuel, food and other goods affected by price increases. If you can, negotiate supplier contracts early to lock in rates.

2.   Plan for potential interest rate cuts: If your business has borrowing (loans, overdrafts or credit lines), a rate cut in August could reduce your costs. Consider reviewing repayment terms or refinancing if you expect rates to drop further later in the year.

3.   Watch your cashflow: If the economy is stalling, demand in some sectors may weaken. Make sure you have a clear view of your cashflow over the next 3-6 months. Adjust your spending plans if needed and chase payments due from your customers promptly.

4.   Take care with hiring decisions: Given slower economic growth and higher employer NICs, it’s sensible to be cautious with recruitment. Consider flexible or temporary options if you’re unsure about long-term demand.

5.   Exporting? Look abroad for growth: Some UK businesses are still thriving by focusing on overseas markets. If your product or service can be exported, this may be a way to grow even if domestic demand softens.

6.   Be ready for tax changes at the Autumn Budget: The Chancellor will face difficult choices later this year, and some are anticipating further tax changes. We’ll be keeping you updated as we learn more.

Final thoughts

It’s a challenging environment, but not without opportunities. If you stay alert, control what you can, and keep your plans flexible you’re likely to be well placed to keep your business resilient as the economic picture develops.

If you need help reviewing your costs, cashflow or hiring strategy in light of these changes, we’re here to help.