UK firms face a grim outlook as growth is forecast to "flatline" in the next quarter as economic headwinds and the cost of living crisis bite.
The Confederation of British Industry (CBI) anticipates private sector activity to be broadly flat in the three months to August, marking the lowest expectations for private sector growth since February 2021.
Companies face a hit from a reduction in household consumption as economic growth is set to weaken and inflation likely to peak again in October amid surging energy bills and is forecast to hit 10% by the end of this year.
CBI’s latest Growth Indicator suggests output growth in the manufacturing sector will "remain solid", while distribution sales are poised to be broadly flat, growing by 3%.
In the next quarter, business & professional services activity is expected to fall 1%, and consumer services activity is forecast to slump 23%.
The weak outlook contrasts with private sector growth in the previous quarter, which picked up slightly to reach a six-month high as manufacturers and business & professional service firms grew at a faster pace.
CBI said there was a sharp deterioration in optimism over the three months to May across all key industries.
The group added the fall in confidence among manufacturers (-31%) and business and professional services (-21%) was the sharpest since mid-2020.
Economists have warned that consumer services firms will "particularly be feeling the squeeze" in the coming months and beyond as household budgets tighten.
Alpesh Paleja, CBI lead economist, said: "It’s worrying that expectations for private sector activity have worsened, but unsurprising given that headwinds continue to intensify.
"The chancellor’s new targeted support package for low-income households is the right thing to do and will help people facing real hardship. But addressing faltering business confidence will require more action.
"Amid a worsening economic outlook, the government must work with business on a genuine plan for increasing business investment and get growth going again, particularly as costs continue to soar."