How are economic stagnation and rising costs impacting UK businesses?

The UK economy is bracing for a tough year ahead. The Bank of England’s latest quarterly inflation report includes the UK’s economic growth forecasts for 2025, which have been slashed in half, with Gross Domestic Product now expected to rise by just 0.1%, down from 0.3% earlier in the year. While this narrowly avoids a recession, the outlook does not look positive. Inflation, currently expected by the Bank of England to rise sharply to 3.7% later this year due to surging energy costs, is not projected to return to the Bank’s 2% target until late 2027.

The UK’s ongoing economic stagnation is already having tangible effects. In 2024 alone, 23,872 registered company insolvencies were recorded – a stark warning of the difficult road ahead. With the economic climate unlikely to improve significantly in the near term, businesses must prepare for continued financial strain and potential insolvency risks.

On 6 February 2025, the Bank of England cut the base interest rate from 4.75% to 4.5%, its lowest level since June 2023, with predictions for further decreases. Chancellor Rachel Reeves welcomed the move, stating it would help businesses grow and borrow more affordably. Whilst lower rates may provide some financial relief, expectations for further cuts could be met with disappointment. Bank of England Governor Andrew Bailey has already signalled a “gradual and careful approach” to reducing rates further, citing concerns over inflationary pressures, particularly from potential US trade tariffs. Given the persistence of stagflation – where stagnant growth meets stubborn inflation – UK businesses should not rely on monetary policy and the associated cheaper cost of borrowing alone to ease their struggles.

Whatever relief businesses gain from lower interest rates may be eroded by rising operational costs. From April 2025, businesses will face a higher minimum wage and increased employer National Insurance contributions. The impact of these changes is already being felt; Sainsbury’s has announced plans to cut 3,000 jobs to offset rising tax and wage costs following Chancellor Reeves’ budget. Adding to this uncertainty, the Government has confirmed that an extensive consultation on the Employment Rights Bill will take place in 2025. Any expansion of workers’ rights is unlikely to take effect before 2026, but businesses should start preparing for potentially higher compliance costs and increased employer obligations.

With economic stagnation, rising insolvencies, and escalating employment costs, UK businesses face a challenging and uncertain future. If you are a director of a company which is facing financial difficulties, you should consider taking the following steps, to protect your own personal liability and the company creditors:

• Seek independent advice from a lawyer or licensed insolvency practitioner as soon as you become aware of potential financial difficulties. They can advise you on your options and whether a recovery strategy or insolvency strategy is more appropriate.
• Always keep your director duties in mind. Your actions must comply with these duties and may be scrutinised at a later date by an officeholder if the company enters into a formal insolvency process.
• Only continue trading if it is the best course of action for creditors as a whole and take steps to minimise the loss to creditors.
• Maintain a good and consistent line of communication with all creditors.
• Have regular board meetings to discuss the company’s financial position, and keep details and accurate minutes which set out each step taken to improve the creditor’s position or ensure their interests are not prejudiced. Keeping minutes will assist the board should they be required to explain their decision-making later.
• Immediately respond to any demands for payment and legal proceedings served on the company, even if you cannot pay them.
• Ideally every week you should ensure that realistic budgets, forecasts, and management and trading accounts are reviewed.
• Ensure accounts are being properly kept up to date.
• Conduct a full review of the costs and expenditure of the company; consider what non-essential expenditure can be reduced or avoided at an earlier stage.
• Check what insurance cover the company has and review the policy documents carefully, seeking guidance from your broker if necessary.
• If avoiding insolvent liquidation is not an option, you should take immediate advice on instituting a formal insolvency procedure without delay.

If you are concerned about the above impacts or the financial health of your company, please contact Aman Sehgal.