Business owners across the UK are navigating an increasingly complicated economic landscape. Inflation has edged up once more, and recent data reveals that the economy has contracted for two consecutive months. So, what’s really happening — and what steps should you be considering as a business owner?

Inflation Ticks Up Again

According to the latest data from the Office for National Statistics, inflation increased to 3.6% in the year to June, up from 3.4% in May. This marks the sharpest monthly rise since January 2024, largely driven by higher prices for motor fuel and food. Notably, food price inflation has now risen for the third month in a row.

The Bank of England forecasts inflation will peak around 3.7% during the summer, before trending down towards its 2% target later in the year. However, at present, escalating prices continue to impact both consumers and businesses alike.

Signs of Economic Weakness

The economy contracted by 0.1% in May, following a similar 0.1% decline in April. These results were below expectations and attributed mainly to a slowdown in manufacturing output and a dip in retail sales. While earlier in the year the economy showed signs of robust growth, that momentum appears to have been short-lived — partly influenced by changes to US tariffs and the conclusion of the UK’s stamp duty relief.

Technically, the UK is not in recession, but the data suggests the economy is under strain. Confidence across several sectors remains fragile, and any growth in the coming months is likely to be limited.

Possible Interest Rate Cuts Ahead

Some respite could be on the way in the form of interest rate reductions. Andrew Bailey, Governor of the Bank of England, has signalled that rates are likely to head “downward”, and many analysts anticipate a cut at the Bank’s next meeting in August.

With the base rate currently at 4.25%, a reduction would help ease borrowing costs, potentially offering relief on mortgages, loans and other credit. While the Bank remains cautious due to inflation still exceeding its target, Mr Bailey has stated that if the labour market shows signs of softening, the Bank would be prepared to adjust rates.

Encouragingly, there are signs of a cooling job market. The number of vacancies has dropped to its lowest since 2021, and more individuals are returning to the labour force.

Increased payroll expenses are also weighing heavily on employers, due to recent rises in both National Insurance contributions and the National Living Wage. The National Trust, for example, has attributed these pressures as factors behind its forthcoming decision to reduce its workforce by 550 roles in the coming weeks.

What This Means for Your Business

Here are some key considerations and practical suggestions to help you navigate the current environment:

  1. Stay on top of rising costs: With inflation climbing again, it’s vital to review your expenditure — particularly for fuel, food and other inflation-sensitive goods. Where possible, renegotiate supplier agreements early to secure more favourable terms.

  2. Prepare for potential rate cuts: If your business carries any borrowing — such as loans, overdrafts, or credit facilities — a rate cut in August could reduce interest charges. Consider reviewing your financing arrangements now in anticipation of further adjustments later in the year.

  3. Manage your cashflow carefully: Slowing economic activity could weaken demand in certain sectors. Maintain a clear view of your projected cashflow over the next three to six months. Adjust your spending where necessary and ensure outstanding invoices are followed up without delay.

  4. Recruit cautiously: With economic growth slowing and employer National Insurance contributions increasing, it’s wise to approach hiring with care. Temporary or flexible roles might offer greater agility if longer-term demand remains uncertain.

  5. Consider international opportunities: Some UK businesses are finding success by targeting overseas markets. If your offering is exportable, this could be a valuable avenue for growth amid softer domestic demand.

  6. Anticipate possible tax changes in the Autumn Budget: The Chancellor will face difficult decisions later this year, and further tax changes are a possibility. We’ll keep you updated as developments unfold.

Final Thoughts

Although the economic outlook presents real challenges, there are still opportunities to adapt and thrive. Staying proactive, keeping your plans flexible, and focusing on areas within your control will help you maintain business resilience in the months ahead.

If you’d like support with managing your costs, planning your cashflow, or adjusting your workforce strategy, our team is here to assist.