A new survey has found that the UK’s post-pandemic recovery is losing momentum as inflation worries spread and business sentiment turns negative, stoking fears of a stagflationary period not seen since the 1970s.

The British Chamber of Commerce’s (BCC) latest Quarterly Economic Survey (QES), published today, found that 58% of firms – the highest percentage on record – expect their prices to increase in Q1 2022.

Only 1% of firms surveyed – which is within the margin of error – expect their prices to decrease in the next three months.

The QES is Britain’s largest independent survey of business sentiment and a leading indicator of UK GDP growth.

Its latest edition suggests that the UK’s post-pandemic recovery stalled in Q4 2021, with firms facing unprecedented inflationary pressures.

The survey of almost 5,500 firms showed that some indicators also revealed a continued stagnation in the proportion of firms reporting improved cash flow and increased investment.

Inflation was the top issue for firms, while a rise in interests rate was also a cause for concern for many.

Business activity flatlines

Just under half of firms (45%) reported increased domestic sales in Q4 2021, compared to 47% in Q3 2021.

Meanwhile, 16% of firms reported a decrease in domestic sales, which is unchanged from Q3 2021.

In the services sector, the balance of firms reporting increased domestic sales dropped to +26% in Q4 2021, down from +31% in Q3 2021.

In the manufacturing sector, the balance of firms reporting increased domestic sales was +22% in Q4 2021, down from +28 in Q3 2021.

The BCC notes that, prior to the UK’s surge in Omicron infections, hotels and catering had been the most likely to report increased domestic sales (55%).

This represented the beginning of a potential recovery, as the sector was also the most likely to report decreased sales throughout the pandemic prior to Omicron.

For example, at the start of the pandemic in Q2 2020, 94% of hotels and catering firms reported decreased sales and cash flow.

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Plan B and other restrictions

Worryingly, the BCC warns that a similar decline is now possible in the face of the Omicron variant and the government’s implementation of Plan B restrictions.

Plan B restrictions in England – such as working from home and mandatory mask-wearing – have already caused many businesses to behave as if they were under prior lockdown orders, with many cancelling Christmas parties and other events as a cautionary measure.

But in Wales and Scotland, an even more onerous set of restrictions is now in place, and it is the hospitality sector that is most affected.

In Scotland, since Boxing Day, indoor standing events are limited to up to 100 people, indoor seated events to up to 200 people, and outdoor events to up to 500 people.

In Wales, likewise since Boxing Day, indoor events are limited to up to 30 people, and outdoor events (including amateur sports) are limited to up to 50 people. Professional sports can take place but without spectators.

For the hospitality sector, customers in Wales must not meet with more than five other people in pubs, cafes, or restaurants, and table service is compulsory.

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Unprecedented Inflationary Pressures

As noted above, 58% of UK firms expect their prices to increase in the next three months.

The percentage expecting an increase rises dramatically to 77% for production and manufacturing firms, 74% for retailers and wholesalers, 72% for construction firms, and 69% for transport and distribution firms.

As the BCC emphasises, these percentages are the highest on record.

When asked why they were facing pressures to raise prices, 94% of manufacturers cited raw materials, 49% cited other overheads, 30% cited pay settlements, and 13% cited finance costs.

When asked what was more of a concern to their business than three months ago, 66% of firms overall cited inflation (compared to 52% in Q3 2020 and 25% in Q4 2020).

Concerns over higher interest rates rise sharply

The number of firms citing interest rates as a concern rose to one in four (27%) in Q4 2021, up from 19% in Q3 2021.

Among manufacturers, 28% cited interest rate hikes as a concern – the highest since the metric was first collected in Q4 2009 – which was up from 21% in Q3 2021.

Among service sector firms, 29% cited interest rates as a concern in Q4 2021, which is the highest reading seen since Q3 2014 and up from 22% in Q3 2021.

Little recovery to cash flow

Overall, 31% of firms reported an increase in cash flow, while 46% reported no change and 23% reported a decrease.

The BCC notes that, given that these figures were reported before the full impact of Omicron and the introduction of Plan B, this metric is a cause for concern, as some firms are still struggling to recover from heavy losses incurred since the start of the pandemic.

Importantly, the BCC said that most firms are still not investing, further indicating the stagflationary environment previously warned of by Trade Finance Global.

Investment in plant, machinery, or equipment also continued to flatline in Q4 2021, with 29% overall reporting an increase, while 60% reported no change, and 11% a decline.

This was largely unchanged from Q3 and Q2.