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UK economy contracts in March as consumers face surging inflation

Michael Brown

Content Writer
Published: 12/05/2022

Consumers cut back on spending as cost of living begins to bite.

Britain’s economy contracted by 0.1% in March, according to data released by the Office for National Statistics (ONS) today.

“The March decline highlights the pressure the economy is now coming under from the cost of living squeeze and the danger of it falling into outright recession later this year,” said Rupert Thompson, Investment Strategist at Kingswood.

The services sector, which includes contributions from education, arts and entertainment, and food service among others, fell 0.2% last month and was the main contributor to this decline.

More particularly, retail and wholesale activity fell 2.3% in March, with new car sales struggling to grow due to global supply issues.

“Household expenditure was still positive in the first quarter, as consumers took advantage of new-found freedoms to go out and spend money in shops, restaurants and hotels. But that was really the calm before the storm, as higher energy prices and taxes kicked in from April,” said Laith Khalaf, head of investment analysis at AJ Bell.

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Inflation continues to soar, cost of living only to worsen

The latest Consumer Price Index continues upward to 6.2%, adding to fears over the increased cost of living.

The latest Consumer Price Index (CPI) was recorded at 6.2% this morning. This means inflation has hit a new 30 year high, which will only exacerbate the cost of living.

“This is the highest CPI 12-month inflation rate in the National Statistic series which began in January 1997, and the highest rate in the historic modelled series since March 1992, when it stood at 7.1%,” the Office for National Statistics (ONS) stated.

The rise can be attributed to a number of diverse contributions. This included a bump in prices for clothing, footwear, toys and other recreational goods, said the ONS.

Other causes of inflation also included increasing energy and prices, according to Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown.

“The perfect storm of massive fuel and energy price rises, accompanied by food price hikes, supply chain problems and booming demand from those with lockdown savings to spend, pushed prices into the stratosphere,” she said.

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Further identity checks for UK shoppers in place from today

Strong Customer Authentication regulation will now require online shoppers to verify themselves before paying at the checkout after £376 million was lost to online fraud in 2020.

Strong Customer Authentication (SCA), which has been endorsed by the Financial Conduct Authority (FCA) and UK Finance, will be in place from today. These regulations have been enforced as an attempt to reduce the £376 million lost in online fraud in 2020, according to Barclaycard.

SCA will now require UK online shoppers to prove their identity by fulfilling two of the three requirements: providing something they possess, such as a mobile number or email, providing something they are, such as a fingerprint or face ID, or something they know, such as a pin or passcode.  

Some transactions, which are deemed low-risk, will be exempt from these protocols. These include subscriptions and low-value purchases. 

“This measure will go a long way to prevent unauthorised fraud, which caused £261.7 million of losses in the first half of last year for online card transactions,” said Robin Bwalya, Manager of Payments Policy at UK Finance, in a blog post.

Despite slowly implementing SCA in February this year, research from Barclaycard found that 1.2 million online transactions worth over £100 million were declined in this month alone.

“The introduction of mandatory SCA is the most significant payments milestone since the rollout of Chip & Pin more than 16 years ago,” Rob Cameron, CEO of Barclaycard Payments, claimed.

“Merchants who aren’t yet ready should start to prioritise becoming compliant to avoid losing out on sales,” he said.

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Economic recovery to halve this year, UK Chamber of Commerce warns

Rising inflation, upcoming tax increases, and geopolitical shocks will all contribute to a slower recovery from the pandemic.

Britain’s economic recovery from the COVID-19 pandemic will halve this year, according to British Chambers of Commerce (BCC).

The business lobby downgraded its UK Gross Domestic Product (GDP) growth to 3.6% in its Quarterly Economic Forecast today, after expecting it to expand as much as 4.2% in December. Significantly, this latest predicted figure is less than half the 7.5% growth seen last year.

“Our latest forecast signals a significant deterioration in the UK’s economic outlook,” said Suren Thiru, Head of Economics at BCC.

Much of this can be owed to escalating inflation, new tax hikes, and “global shocks”.

“The UK economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of UK output, including consumer spending and business investment,” said Thiru.

This is also expected to have an impact on consumer spending. Despite expecting consumer spending to grow at 6.9% in 2022, the BCC has now revised this figure to 4.4%.  

“Our latest outlook suggests a legacy of COVID, and Brexit is an increasingly unbalanced economy with a growing reliance on household spending to drive growth. Such economic imbalances leave the UK more exposed to economic shocks and reduces our productive potential,” said Thiru.

In addition, the BCC said it expected inflation to outpace wage growth until the second quarter of 2024, which will put further pressure on consumer spending in the mid to longer-term.

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Call for action to help fund small business growth

Difficulties in getting hold of finance is one of the things holding the UK’s small businesses back. This concern has been highlighted by the Federation of Small Businesses (FSB), whose Q4 2021 Small Business Index also highlights increasing costs and skilled staff shortages as factors hampering growth this year.

The study of 1,200 small businesses found 54% plan to grow in 2022, which is a higher figure than that seen in the same quarter two years earlier, before the pandemic. On the other hand, business confidence was lower in Q4 than it had been throughout the previous year, at a net negative value of -8.5.

Although a high proportion (22%) of businesses said labour costs were an impediment, and 78% flagged concerns over operating costs, a further 11% of businesses surveyed said getting hold of finance was a dampener on their growth plans.

In the final quarter of 2021, fewer than half (45%) had loan applications approved, the lowest proportion since 2014. Lenders offered rates of 4% or more to 52% of the businesses, while 11%+ was offered to more than one in 10 (13%).

The report notes: “The credit availability and affordability indices worsened to levels not seen since Q1 2020, with readings of -10.8 and -11.4, respectively. Affordability is likely to worsen further in Q1, following the Bank of England’s December rate hike.”

Now the FSB is calling on the Government to introduce more business-friendly policies to help spur post-pandemic recovery ambitions for entrepreneurs. It urges banks and financial lenders not to “pull up the drawbridge” as it says they did in the wake of the financial crash more than a decade ago.

Funding the “employers and innovators of tomorrow”

FSB National Chairman Mike Cherry said: “After two years of turmoil, in which firms have once again shown their adaptability and resilience, the small business community stands ready to spur our economic recovery.

“Their optimism is, however, hampered by spiralling inflation, labour shortages and looming tax grabs. Come April, they’ll be faced with a jobs tax hike, an increase in dividend taxation and fresh business rates bills.

“The bounce back loan initiative was a real success, but it can’t be thought of as job done. New enterprises are launched every day across the UK, never more so than at times like this when the economy is changing apace. Our start-ups need funding to go on and be the employers and innovators of tomorrow.

“After the financial crash we saw banks pull up the drawbridge for small businesses. With emergency loan initiatives and the New Enterprise Allowance at an end, it’s vital that this trend doesn’t take hold once again.” 

 

How to choose the best business loan for you

There are several options for businesses in search of funding. A non-secured business loan operates by looking at the creditworthiness of the business and its ability to pay the loan back. Businesses looking for a secured loan could put up their commercial property or other assets against the value of their loan.

If funds are needed quickly and for a short time, a bridging loan is worth looking at. A commercial mortgage is more suitable when finance is needed for a longer time. The interest rates for this business lending may vary depending on the sector you operate in, the credit history of your business and the assets you have available to secure your finance.

To organise a business loan, you may wish to speak to our preferred business loans broker, Watts Commercial Finance on 03300 417275. Compare business loans by checking out our chart.

 

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Most Popular Business News

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Economic recovery to halve this year, UK Chamber of Commerce warns

4th March 2022

Rising inflation, upcoming tax increases, and geopolitical shocks will all contribute to a slower recovery from the pandemic. Britain’s economic recovery from the COVID-19 pandemic will halve this year, according to British Chambers of Commerce (BCC). The business lobby downgraded its UK Gross Domestic Product (GDP) growth to 3.6% in its Quarterly Economic Forecast today, after expecting it to expand as much as 4.2% in December. Significantly, this latest predicted figure is less than half the 7.5% growth seen last year. “Our latest forecast signals a significant deterioration in the UK’s economic outlook,” said Suren Thiru, Head of Economics at BCC. Much of this can be owed to escalating inflation, new tax hikes, and “global shocks”. “The UK economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of UK output, including consumer spending and business investment,” said Thiru. This is also expected to have an impact on consumer spending. Despite expecting consumer spending to grow at 6.9% in 2022, the BCC has now revised this figure to 4.4%.   “Our latest outlook suggests a legacy of COVID, and Brexit is an increasingly unbalanced economy with a growing reliance on household spending to drive growth. Such economic imbalances leave the UK more exposed to economic shocks and reduces our productive potential,” said Thiru. In addition, the BCC said it expected inflation to outpace wage growth until the second quarter of 2024, which will put further pressure on consumer spending in the mid to longer-term.

Rising inflation, upcoming tax increases, and geopolitical shocks will all contribute to a slower recovery from the pandemic.

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UK economy contracts in March as consumers face surging inflation

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Britain’s GDP contracted by 0.1% in March, according to data released by the Office for National Statistics (ONS) today. “The March decline highlights the pressure the economy is now coming under from the cost of living squeeze and the danger of it falling into outright recession later this year,” said Rupert Thompson, Investment Strategist at Kingswood. The services sector, which includes contributions from education, arts and entertainment, and food service among others, fell 0.2% last month and was the main contributor to this decline.

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