Britain’s economy is showing signs of stalling as high inflation hits new orders and businesses report levels of concern that normally herald a recession, a closely watched industry survey showed on Thursday.

S&P Global’s Purchasing Managers’ Index (PMI), covering services and manufacturing firms, also showed companies raising pay and passing higher costs on to clients, a worry for the Bank of England.

The PMI’s preliminary composite index held at 53.1 in June, above the median forecast of 52.6 in a Reuters poll of economists and unchanged from May.

But its measure of new orders fell to 50.8, the lowest in over a year. Factory orders dipped below the 50.0 growth threshold to 49.6.

In addition, UK private sector firms say demand has been hit by purchase-hesitancy and squeezed budgets due to high inflation.

Samuel Tombs at Pantheon Macroeconomics said that due to an additional public holiday across the country, the economy was expected to shrink even further in the April-June period.

“We still are content with our forecast for a 0.7% quarter-on-quarter decline in GDP in Q2 and only a partial recovery in Q3,” he said.

The PMI’s business expectations index fell by 4.6 points in June, the greatest monthly decline since the start of the pandemic.

Meanwhile, Britons are paying higher living costs and fuel prices as national inflation climbs to 9.1 percent, as the highest record in the past forty years. The Bank of England (BoE) is worried that the recent jump in inflation might turn into a permanent problem for the British economy.

Last month, soaring food prices, particularly bread, cereal, and meat, helped drive the latest increase in the cost of living in the UK.

With the economy already on track to shrink in the second quarter, the risk is that ebbing confidence weighs further on spending, delivering a recession later this year. 

More pain also lies ahead, with the BOE predicting inflation will climb above 11%, more than five times its target, as more energy bill hikes kick in come October. 

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