Businesses’ energy costs may derail upturn

Just over a month ago, this column declared that the UK’s commentariat “has been too gloomy for too long”. With some trepidation, I suggested “multiple green shoots of recovery” were emerging and it was time to cheer up.

With spring upon us, others now share this view. The sap of consumer confidence is rising – so says the latest survey from the professional services firm PwC. While still in negative territory, PwC’s consumer sentiment index was at minus 25 in March, significantly up on minus 32 in January and minus 44 last autumn.

A third of consumers polled describe their finances as “healthy”, while just one in 10 are “struggling”. New car registrations were also up almost a fifth last month compared to March 2022, according to the Society of Motor Manufacturers and Traders.

On top of that, the UK’s services sector – four fifths of our GDP – continues to recover. The Purchasing Managers’ Index was below 50 in each of the months between October and January, indicating the sector was contracting. However, survey readings of 53.5 in February and 52.9 in March point to buoyant growth driven by rising new orders – boosted by strong overseas demand.

Most important of all, positive sector-specific survey evidence from both PwC and PMI underscores official confirmation that the UK economy as a whole avoided recession during the second half of last year – as some of us predicted. Revised figures show that GDP, having dropped 0.1pc between July and September, amid shockwaves from the war in Ukraine, grew by the same amount during the last three months of 2022 – avoiding two successive quarters of contraction.

While there were several reasons for this, with the construction and telecoms sectors faring better than expected, manufacturing showed particular resilience – playing an important role in helping to keep recession at bay. And, if I’m honest, that’s my concern.

The UK remains a top 10 global manufacturer, with the sector generating around 10pc of GDP. Manufacturing provides 2.5m jobs – and many more in supporting activities. These jobs pay well, with wages some 10pc-15pc higher than the economywide average, often in parts of the country where pay tends to be quite low. The sector also accounts for almost half of UK exports and two thirds of research and development spending – a vital source of broader growth.

Britain is now widely expected to register an ongoing, if still rather fragile, economic recovery this year. Falling global gas prices should help push down headline inflation – and, as interest rates peak in the UK and elsewhere, both consumer and business sentiment is expected to improve further.

The reality is, though, that despite some decent survey data, the economy is actually on a knife edge. Financial markets look precarious, recession was a near miss and, at any moment, the geopolitical outlook – relating to Russia, China or elsewhere – could get significantly darker.

That’s why, as I wrote in my “green shoots” column last month, it’s of overwhelming importance that the Government doesn’t stamp on this recovery. And yet that’s what I fear may happen – especially when it comes to our vital manufacturing sector and the issue of still sky-high energy costs.

Household energy bills, up at £2,500 a year for combined gas and electricity on average last autumn, are starting to fall – and are expected to retreat below £2,000 from July. While the family finances of millions were left reeling from rocketing bills in the aftermath of Russia’s invasion of Ukraine in February 2022, as wholesale energy prices surged, there are signs of some respite.

Household energy costs will remain well above historic levels – bills averaged around £1,100 a year during the three years before the war in Ukraine. However, as gas prices ease across the globe, and with the Government continuing to provide support, cheaper utilities will ease the cost of living crisis, giving the economy a boost.

When it comes to businesses’ energy bills, however, the picture is very different. Last week, a multibillionpound across-the-board scheme providing support with firms’ energy costs cane to an end. What remains is a stripped-back version, with support limited only to steelmakers and some other highly energy-intensive industries and public sector entities.

But that leaves in the lurch countless small and medium-sized manufacturers, with energy bills still 20pc-40pc of their cost base, now coping with brutal increases.

Steve Hardeman is chief executive of Clevedon Fasteners in Sutton Coldfield, which for more than 80 years has made specialised screws and fixings. The energy bill to drive his multiple machines, £5,000 a month before the Ukraine invasion, is now a potentially ruinous £16,000.

What’s more, Clevedon Fasteners won’t now benefit from falling wholesale electricity prices – which have dropped some 80pc since they peaked last summer and autumn. Hardeman says he was “forced by my energy provider, with a gun to my head, to sign a long-term energy contract last year – so higher prices are locked in”. He’s now paying 46p/kWh for electricity, compared to a spot market rate of around 28p/kWh.

If that sounds implausible, I’ve heard the same story from countless small-scale manufacturers over recent weeks. The Confederation of British Metalforming (CBM), representing hundreds of manufacturers employing tens of thousands of workers, has written to ministers to report that, with government support gone: “Many UK manufacturers now face uncompetitive energy costs, having been coerced to enter fixed contracts at the peak of the wholesale market last year between July and December.”

Some will say this is special pleading – and grown-up business bosses, if they sign bad contracts, should take the consequences. Others argue that firms unlucky enough to have reached the end of existing deals last autumn, having been forced to renew while prices were sky-high or face being cut off, deserve a bit of protection.

Andy Street, the Tory West Midlands Mayor who used to run John Lewis, is backing the CBM. Ministers should now “force” energy providers to release companies from fixed-term contracts with “artificially high prices”, he tells me – a big statement from a Conservative with serious business experience.

This issue of companies’ sky-high energy costs – and their potential impact not only on the economy but also the Tories’ chances of holding Red Wall seats across the Midlands and North – has yet to register at Westminster.

‘Financial markets look precarious, recession was a near miss and the geopolitical outlook could get significantly darker’