Business confidence slumped in June, with manufacturers and service providers reporting their lowest levels of business optimism since May 2020, according to the S&P Global/CIPS Flash UK PMI Composite Output Index.

The fall of 4.6 points was the largest monthly decline since the start of the pandemic.

The closely-watched survey says: “Worries about customer spending cutbacks and the impact of rapid inflation on the longer-term economic outlook led to another fall in business activity expectations. Optimism at UK private sector companies has declined in each month since February and is now the lowest for just over two years.”

The headline seasonally adjusted S&P Global/ CIPS Flash UK Composite Output Index in June was unchanged from May at 53.1, posting above the neutral 50.0 value for the sixteenth consecutive month.

However, the headline index was the joint-lowest seen over this period and much weaker than the average in the first quarter of this year at 58.3.

By sector, service providers, at 53.4, continued to outperform manufacturers, at 51.2, with the latter signalling only marginal production growth in June amid widespread reports of weaker demand as well as ongoing supply issues.

However, new order volumes across the private sector fell to 50.8 in June from 53.8 in May, which signalled only a marginal overall expansion and the weakest rate of growth since the recovery began in March 2021.

Manufacturing order books were particularly subdued, with this index slightly below the 50.0 no-change threshold and pointing to the weakest performance for two years. Firms cited hesitancy among clients and squeezed budgets due to rising inflation as key factors holding back demand.

The report adds: “A sustained recovery in events and other areas of face-to-face consumer spending helped to boost business activity in the service economy. However, many survey respondents also cited growth headwinds from the cost of living crisis and heightened economic uncertainty.”

The study adds that strong wage pressures added to cost burdens at private sector firms in June. Overall, input prices increased at a slightly slower pace than in May, but the rate of inflation was still the second-fastest since the index began in January 1998.

S&P Global Market Intelligence chief business economist Chris Williamson says: “The economy is starting to look like it is running on empty. Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand.

“Manufacturers, in particular, are struggling with falling orders, especially for exports, and the service sector is already seeing signs of the recent growth spurt from pent-up pandemic demand move into reverse amid the rising cost of living.

“Business confidence has now slumped to a level which has in the past typically signalled an imminent recession. The weakness of the broad flow of economic data so far in the second quarter points to a drop in gross domestic product which the forward-looking PMI numbers suggest will gather momentum in the third quarter.”

CIPS group director Duncan Brock adds: “The economic uncertainty brought about by war disruptions, the cost of living crisis, and China’s Zero Covid-19 policy, have all dampened business optimism to its lowest point since the start of the pandemic.

“New order growth was also at its lowest point since February 2021. The manufacturing sector was one of the worst affected, with new orders decreasing at the fastest rate for two years. The service sector fared better as hospitality and events businesses came roaring back to life after the end of multiple lockdowns.

“However, supply chain managers have expressed concerns over the current cost of doing business, with inflation hitting a 40-year high and businesses increasingly having to pass costs on to consumers.

“The supply chain squeeze seemed to have little effect on the job creation numbers as the UK saw the highest staffing increase since March this year. Though, this is most likely a sign of businesses making up for the staff shortages suffered earlier in the year. So, with business expectations now the lowest since May 2020, the next few months will be a true test for how sustainable this capacity building will be.”