The UK economy saw growth of 0.2% in July, following a sharp fall of 0.6% in the previous month, according to the Office for National Statistics (ONS)

The UK economy grew slower than expected in July as worker shortages and inflation weighed heavily on activity amid the growing risk of recession. 

According to the ONS, gross domestic product (GDP) rose by 0.2% in July, after a sharp fall of 0.6% in June 2022. Though 1.1% above pre-coronavirus levels, GDP was flat in the three months to July compared with the previous three months.

The services sector was the biggest contributor to growth, seeing a rise of 0.4%, following a 0.5% drop between May and June.

Yael Selfin, chief economist at KPMG UK, said: ‘The feeble 0.2% bounce back in July was driven by weak GDP in June due in part to the loss of working days from the Jubilee long weekend.

‘More concerning, July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer.

‘This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses

‘While nearly £170bn worth of fiscal measures announced last week may be sufficient to avoid a deeper economic slump, these will be partly offset by tighter Bank of England monetary policy focused on combating the high levels of inflation.’

The figures come amid growing concerns over Britain’s economy as soaring inflation and rising costs weigh heavily on households and businesses. The Bank of England warned that the UK will likely fall into recession at the end of the year, which could last until early 2024.

The information and communication sector grew by 1.5%, the largest contributor to services growth in July. The main driver was computer programming, consultancy, and telecommunications.

Production fell by 0.3% after a fall of 0.9% in June, mainly because of a drop of 3.4% in electricity, gas, steam, and air conditioning supply.

Jake Finney, economist at PwC, said: ‘Looking beneath the headlines, it’s clear this positive growth rate was primarily led by the performance of the services sector. Two of the other main engines of economic growth – production and construction – contracted in July.

‘Despite today’s positive growth figures, our expectation is that the UK economy will contract in the third quarter of 2022, following its 0.1% contraction in the second quarter. This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended.’

Following weeks of hustings and debate, the members of the Conservative party have elected Liz Truss as their party leader and new prime minister

The popular vote was won by home secretary Liz Truss with 57% of the vote with a share of 80,326 votes, while former chancellor Rishi Sunak took 43% at 60,345 votes.

In a short speech before MPs, Truss promised to govern as a Conservative for the next two years, prioritising cutting taxes and dealing with the energy crisis, long term energy supply issues, and National Health Service.

In earlier interviews, Truss said that she would set out her economic plans within the next week to address the energy crisis and cost of living issues.

The official handover will take place at Balmoral when the Queen invites Truss to form the new government following the resignation of Boris Johnson.

The new Cabinet will be confirmed in the next few days with key appointments likely to be confirmed late on Tuesday.

In contrast to her opponent Sunak, Truss has focused on tax cuts as a central plank of her policy.

Simon Rothenberg, a director at Blick Rothenberg, said: ‘Liz Truss has led with the promise of significant tax cuts such as the reversal of Rishi Sunak’s 1.25% National Insurance, likely to be targeted at basic rate taxpayers only. 

‘Truss is also said to be favouring a substantial increase to the basic rate threshold, possibly as high as £80,000 – a promise Boris Johnson led with during the 2019 Conservative Party leadership campaign but never materialised during his tenure. These will help, but they are not immediate fixes.

‘I expect a budget in the coming weeks with a lot of promises before this around helping households with energy prices and the cost-of-living crisis – help is urgently needed, and it will be at a very significant cost to HM Treasury.

‘There was little or no promise to help, in the immediate future, the businesses who are being crippled by the complete lack of any energy price cap – tax cuts (including stopping the proposed increase in corporation tax to 25%) and a stronger economy will help tomorrow, but they need help today.

‘Pubs, restaurants, shops, hairdressers, along with all other businesses, are receiving their energy bills which, in some cases, show over a 500% increase over the previous bills. This is before they head into winter and while temperatures are still mild.

‘Without any targeted support I fear our retail and hospitality sector will severely struggle over the winter months as households reduce their discretionary spend to afford their own increased prices.’

The package of tax cuts promised in Truss’ campaign appealed to Conservative voters but will be costly to implement without cutting public services to balance the books.

Adrian Young, a tax partner at Hurst, said: ‘Ultimately, the real challenge the new prime minister will face is to maintain public services while delivering tax cuts. The ones she proposed on the hustings alone have been costed at £30bn in some estimates. It was no doubt easy to make these promises as part of a plan to win the premiership.

‘However, the reality for Truss of managing the public finances in the current economic climate will be much more problematic.’

he level of financial distress in companies jumped by 37% in the last quarter compared to the same period last year

Bars and restaurants, retailers and construction sectors were the main sectors affected by tough trading conditions, with year-on-year rises of 70%, 48% and 36% respectively.

The latest Red Flag alert from Begbies Traynor showed that the number of companies rated as being in ‘critical financial distress’ continued to rise, increasing by more than a third in Q2 2022 – edging up 3% compared to Q1 2022.

Julie Palmer, partner at Begbies Traynor, said: ‘Having emerged from the pandemic, many companies were hoping for an economic boom but that has simply fizzled out, as supply chain issues and the invasion of Ukraine have taken their toll by driving up raw material and energy costs and reducing both business and consumer confidence.

‘We are now in a very high inflationary environment that’s piling pressure on businesses that were already weakened by the shock of the pandemic.

‘Sectors most exposed to discretionary consumer spending – bars and restaurants, and general retailers – are feeling the pain most.’

SMEs are also affected, with more than 582,000 companies in significant financial distress, although this figure was unchanged from the previous quarter.

Businesses continue to be impacted by rising inflation, far exceeding the official rate of more than 9%. With high labour, material and energy prices and faltering consumer and business confidence, companies are facing a difficult economic backdrop.

Palmer added: ‘I am also particularly concerned for those SMEs who operate in energy-intensive sectors, such as manufacturing, as some could simply become unviable. Without the benefit of an energy price cap, business energy tariffs have at least trebled, and for many it will be much worse.’

Evidence of this financial distress comes from county court judgement (CCJ) data, which revealed 46,235 rulings in the first six months of 2022, up 5% on the first quarter, as creditors tried to recover debt – there were 59,042 CCJs during the whole of 2021.

CCJs are leading indicators of insolvency, and as the courts return to normal, there are fears this number could rise much further.

Sectors with the highest number of critically distressed businesses include construction, real estate, general retailers and restaurants, automotive and industrial transportation.

Ric Traynor, executive chairman of Begbies Traynor, said: ‘The combination of macro-economic risks is now taking its toll on UK businesses, as evidenced by this latest Reg Flag Alert data.

‘With inflation nearing 10%, and showing little sign of abating, there can be no doubt that things are going to get worse for UK businesses before they get better. This, combined with a deteriorating geo-political landscape, is likely to have serious consequences for the UK economy.

‘Rising insolvency rates, combined with our own evidence from speaking to the directors of distressed companies, highlight the impact of rising costs on businesses. The very same directors, who benefited from government-backed Covid support loans to get them through the pandemic, are now telling us that they are simply unable to repay these debts, plus they are having to deal with rising wage demands and higher input costs.’

In a bid to tackle the cost of living crisis, the Chancellor has announced a £15bn package of support with one-off payments for pensioners and lowest income earners, and doubled the £200 energy bill support

The measures will see one-off payments of £650 for low income earners, £300 for pensioners and a further £150 for disabled people.

Stressing that the energy crisis was affecting the majority of people in the country, he also changed the £200 loan for electricity bills, doubling it to £400 and removing the requirement to pay it back.

Chancellor Rishi Sunak said: ‘To help with the cost of living we are going to provide significant targeted help to those with the lowest incomes, pensioners and the disabled. We will send directly to eight million of lowest income households a one-off payment of £650. The DWP will make the payment in two lump sums, in July and later in the year, and HMRC will make payments to those on tax credits.

‘There is no need for people to fill out complicated forms or bureaucracy – we will send the payment straight into their bank accounts.’

The package also includes support for pensioners and disabled people.

‘From the autumn, we will send over eight million pensioner households who receive the winter fuel payment – an extra, one-off pensioner cost of living payment of £300,’ the Chancellor said.

‘Disabled people also face extra costs in their day-to-day lives – like having energy-intensive equipment around the home or workplace.

‘So, to help the six million people who receive non-means tested disability benefits, we will send them, from September an extra, one-off disability cost of living payment, worth £150.

‘Many disabled people will also receive the payment of £650 I have already announced, taking their total cost of living payments to £800.

‘The most vulnerable will receive support of £1,250.’

The Chancellor also confirmed that benefit payments will rise in line with the September 2022 CPI figure for payments starting in April 2023. In addition, the triple lock will apply to state pensions.

Recognising the extent of the cost of living crisis, the £200 loan for electricity users becomes a grant, and the amount will be doubled to £400 from October.

‘The plan was to provide all households with £200 to help with bills, which was repayable. This support is now unambiguously a grant and the support will be doubled to £400 and not a penny to repay,’ he said.

Energy suppliers will deliver this support to households with a domestic electricity meter over six months from October. Direct debit and credit customers will have the money credited to their account, while customers with pre-payment meters will have the money applied to their meter or paid via a voucher.

This support will apply directly for households in England, Scotland, and Wales. It is GB-wide and there will be equivalent support for people in Northern Ireland.

‘We are raising emergency funds to help millions of the most vulnerable families who are struggling right now,’ the Chancellor said. ‘And all households will benefit from universal support for energy bills of £400 – with not a penny to repay.

‘In total, the measures I’ve announced today provide support worth £15bn.

‘Combined with the plans we’ve already announced…that means we are supporting families with the cost of living to the tune of £37bn or 1.5% of GDP. That’s higher or similar to countries like France, Germany, and Italy.’

Robert Pullen, a partner at Blick Rothenberg, said: ‘After weeks of denials, delay and dithering, the government finally announced a spate of cost-of-living support measures today, ranging from giveaways of £650 per household to converting the previously announced discount on energy bills from a loan to a grant.

‘The total cost of all the measures announced this year is now estimated by HM Treasury to be £37bn, which is equal to the total income tax paid through self-assessment tax returns for 2021/22.

‘Rishi also appears to have learnt from the calamitous administration problems created with previous measures, as we are told the process and paperwork will be far simpler.

‘However, the devil is in the detail and it is possible that many other individuals could miss out on support entirely or receive very little.

‘Whether Rishi will announce further support, or changes to the tax system more widely such as a speculated reduction in the income tax rate or increases to the long frozen basic rate band, which is being severely eroded by inflation, remains to be seen.’

Nigel Morris, employment tax director at MHA, said: ‘While the government has lived up to their promise of evolving their response to the cost of living crisis, as demonstrated by a windfall tax on energy companies and the UK’s energy bill grant doubling to £400, a more rapid rethink on taxes and businesses incentives is urgently required to prevent an impending recession.

‘Reducing the standard National Insurance contribution (NIC) rate back to 12% and lowering the income tax rate from 20% to 19%, even if only temporarily, would provide some much-needed relief for businesses and families across the UK. As demonstrated by the temporary VAT cut from 17.5% to 15% to tackle the 2008 financial crisis, short-term solutions can be highly effective to introduce vital relief and should be considered in the current climate.’

With the cost of living crisis, businesses need to focus on retaining staff and factoring pay increases into overall profitability, explains Stuart Clark, managing director of accountancy firm Russell & Russell

These are hard times all round. Particularly for the generations who have never experienced the inflationary chaos late last century, when interest rates hit 17% and mortgage payments soaked up the bulk of salaries.

That said, it is bad enough now, despite median pay awards to January standing at 3%, their highest for a decade. Employees are being attacked on all fronts, with soaring home energy bills, skyrocketing petrol prices, and startling increases in food – up 13% on average over the past year – and public transport costs.

It is inevitable in this series of financial blows that many employees will turn to their employers to help them weather the storm. And employers who are keen to keep their teams intact will be asking themselves: how can I further increase rewards without damaging the business?

The answer, as in so many otherwise intractable business scenarios, is to know the numbers, analyse them and use them as a clearly signposted pathway towards well-informed decisions.

In practice

The first step in considering remuneration policy is to discern what percentage salaries are of the direct cost of sales, and what the effect on the business would be if that percentage were to go up.

Take, for example, a business with a £3m turnover, gross profit of 30% and a net profit of 10% (£300,000).

An across-the-board increase in direct costs of 6.25% – which may consist of increased wages (and the increased employer contributions on this increased salary) and the increased employer National Insurance contributions (NIC) (up 1.25% this year) as well as any other direct material increases – would mean that the firm would have to increase sales by over £500,000 (ie, over 17% to £3.5m) in order to maintain the same levels of net profit (£300,000).

Or it could increase prices by 4%.

On paper it’s a no-brainer. Yes, a hike in prices might lose some custom, but clients are much more accepting of small increases in the current climate – and, with an 8% increase the firm could even afford to lose some customers and still make the same, or more, net profit. More money for less work.

The trouble is that many companies and organisations don’t look at the situation in this light and assume that they can realistically cover the costs of wage increases by the simple expedient of going out and winning more business. That is an unnecessarily hard hill to climb.

Businesses with strong teams and productive individual workers will obviously want to strain every sinew to retain them. Apart from the disruption inherent in frequent staff turnover, the recruitment costs to replace them are significant, with research suggesting an average of £11,000 per employee.

But there are other ways to encourage loyalty and good staff retention rates, such as offering interest-free loans – up to £10,000 is permitted at the moment – to be offset against future wages. This can help employees with, for instance, expensive season travel ticket costs.

Employee Assistance Programmes can also help to make people feel valued and wanted by supporting them with advice on areas such as financial planning and debt management, and perhaps counselling for staff who are struggling to make ends meet. In these trying times, many firms are also offering mental health support.

Bonus schemes

Bonus schemes are a double-edged sword. While they may be initially welcomed by employees, experience suggests that some staff may quickly feel entitled to them and expect the extra payment simply for doing their job – and become disincentivised if the bonus is withdrawn.

The simplest solution to staff satisfaction is to strive wherever possible to pay the market rate and, if practicable, something over and above.

And, while remaining sensitive to the inflation-fuelled trials that employees face, as well as the 1.25% increase in employers’ NICs, it is not unreasonable for employers to make the case in the workplace that they, too, are under the cosh from unprecedented increases in materials costs, business rates, living wage demands, premises and transport costs, and other margin-eroding pressures.

Responsible employees will take this into account and may be persuaded to exercise restraint if offered a more structured and advanced personal development plan, or a healthier work-life balance. A 2018 study said that 92% of employees felt benefits have a positive impact on overall job satisfaction.

None of these issues are going away anytime soon. UK inflation is at a 30-year high of 9% and may yet go higher. 

But employers who are asking themselves if they can afford to lend a helping hand through wage increases should perhaps, more pertinently, be asking themselves if they can afford not to.

n a speech to the Confederation of British Industry (CBI) the Chancellor has promised tax cuts for businesses in the Autumn Budget

The promise, made at the CBI’s annual dinner, was made with the aim to boost investment ahead of the increase in corporation tax from 19% to 25% from April 2023 for company profits over £250,000.

Speaking at The Brewery in Central London the Chancellor stated that in order to get the tax cuts, businesses needed to ‘invest more, train more and innovate more’ as these were areas which Sunak highlighted as the UK’s ‘weaknesses. He added that this was ‘at the centre’ of his economic outlook.

The Chancellor said: ‘In the Autumn Budget we will cut your taxes to encourage you to do all those things. That is the path to higher productivity, higher living standards, and a more prosperous and secure future.’

Sunak mentioned the temporary 50% cut to business rates during the pandemic however added that ‘of course, there’s more to do’. The Chancellor used the speech to thank the CBI for their support during the Covid-19 pandemic and to reassure the CBI of the government’s pro-business history, stating ‘never, ever doubt we are on your side’.

In the Budget last year Sunak said he would increase the UK’s corporation tax from 19% to 25%, which aims to raise around £17bn annually. Small companies will continue to pay the lower 19% rate.

At the same time, the Chancellor also introduced a temporary ‘super-deduction’ for two years which offered a 130% relief on the purchase of equipment which is equivalent to 25p off a company’s tax bill. The move was done to encourage businesses to invest sooner.

The CBI has previously warned about the impact of ending the scheme, stating that capital investment will fall in 2023 as corporation tax rises at the same time. It stated that this will ‘likely send business investment as a share of gross domestic product to the lowest level in the G7’.

In response to the Chancellor’s speech, CBI president Lord Karan Bilimoria also spoke and urged the government to ‘act immediately’ on the cost of living crisis, stating that he is worried by the current trajectory as it will bring businesses ‘the highest tax burden in 70 years’ and ‘will stifle our recovery and growth’.

Bilimoria also urged the Chancellor to help companies to invest by introducing a permanent successor scheme to the super deduction, which he described as a ‘stroke of genius by the Chancellor’ and ‘of the utmost importance’.

He also called on the government to extend a recovery loan scheme to help businesses access finance and eventually create a long-term replacement, and bring forward a UK digital strategy.

The Chancellor closed his speech by stating that the government’s ‘firm plan is to reduce and reform’ business taxes but that businesses needed to their bit too.

Sunak said: ‘I believe our most exciting companies are still to be founded, our most talented people are still to be taught, and our best ideas are still to be discovered.’

Bank of England (BoE) chief Andrew Bailey defended his performance before MPs, stating that there was nothing else the Bank could have done to prevent inflation from rising to double digits

In a Treasury Committee meeting yesterday, when asked whether there was anything the Bank could have done to have shaped monetary policy differently over the last year, Bailey responded saying, ‘I don’t think we could’.

Defending Threadneedle Street before an announcement tomorrow of the sharpest annual increase in interest rates for four decades, Bailey told the Committee that while he was unhappy about the level of price rises, 80% of the inflation target overshoot was caused by factors outside the Bank’s control.

The war in Ukraine, Brexit, and the Covid-19 pandemic, in particular China’s zero-Covid policy, were the three main issues highlighted by the Bank as being the cause of the spiralling rise in inflation rates with the Ukraine war being described as the ‘big one’ due to the cutting off of energy supplies from Russia.

Bailey raised his concerns about food prices stating, ‘What I’m going to sound, I guess, rather apocalyptic about is food’ adding that Ukraine’s inability to export its crops was a ‘major worry for this country’ with Ukraine being one of the biggest producers of grains including wheat, and sunflower oil.

Bailey said: ‘A sequence of shocks like this, which have come really one after another with no gaps between them, is almost unprecedented. I do see comments based on hindsight, but we have to take [monetary policy] decisions based on the facts and evidence at the time.’

The panel did clarify that monetary policy ‘can have an effect’ but there is ‘nothing policy can do about external factors’, adding that ‘interest rates can help to ensure inflation does not become embedded once these initial shocks fade’.

Bailey said: ‘It is a very, very difficult place to be. To forecast 10% inflation and to say there is not a lot we can do about it is an extremely difficult place to be. This is a bad situation to be in.’

Sir Dave Ramsden, deputy governor of the Bank of England added that Brexit was not the only thing fuelling inflation as the EU, UK and the US are all experiencing similar levels, stating that ‘it was hard to disentangle the effect of global supply constraints and Brexit on inflation’.

However, Bailey added that the Bank had not changed its view that Brexit ‘would have a negative effect on trade’ and that ‘it would take a long time for the economy to adjust that, although it eventually would’.

Member of the Bank of England’s Monetary Policy Committee (MPC) Michael Saunders added that Brexit has become ‘less of a source of uncertainty’ since the Covid-19 pandemic which is why the Bank focused more on Covid-19 recently.

Bailey also acknowledged that the Monetary Policy Committee had changed its view about the UK labour market stating that it now believes it is ‘very tight’ which is something that it could not predict until after the government’s Covid-19 furlough scheme ended.

When asked whether rates should have been put up last year at times of labour shortages after the furlough scheme ended, Bailey added that it ‘had been a key question at the time’, however it was  ‘unclear what the impact of the end of the furlough scheme would have been’ and ‘whether the people who used it would have been reabsorbed in the jobs market’.

Saunders then added that ‘even if the Bank had raised rates more aggressively last year, it’s unlikely that would have brought inflation back down to the target of 2%’.

Bailey’s appearance at the Treasury Committee has come following the aftermath of growing criticism of the Bank’s performance.

However, Bailey stated that no government minister had approached him over monetary policy or the Bank’s independence amidst all the briefings and media coverage over recent weeks.  

Bailey stated that ‘the most important thing we can do is to get inflation back to target without unnecessary disruption to the economy’ and implied that the Bank would not shy away from generating a recession to do that if it was necessary.

Bailey added: ‘This is the biggest test of the monetary policy framework in 25 years. There is no question about that, we have to get [inflation] back to target and that is clear.’