THE UK economy will remain on an “underwhelming growth trajectory”, as Brexit uncertainty, high inflation and weak productivity weigh on activity, British Chambers of Commerce forecasts.

British Chambers reveals record skills shortages in the UK services sector in its latest quarterly survey, published today. Of the services firms that were hiring staff in the fourth quarter, a record 71 per cent reported recruitment difficulties.

The business organisation said: “The findings of the survey indicate the skills shortages are reaching critical levels.”

British Chambers reported the percentage of firms in the manufacturing sector that had encountered difficulties in recruiting staff in the final three months of last year was the highest since the fourth quarter of 2016. The survey found 75 per cent of manufacturing firms that were trying to hire staff encountered recruitment difficulties.

And the proportion of such firms reporting difficulties in hiring skilled manual workers was at a record high of 68 per cent.

British Chambers flagged Brexit as one factor in recruitment difficulties for UK companies, in terms of some people from other European Union countries consequently being less inclined to choose to work in the UK. It also cited an already “very tight” labour market and a longstanding UK skills gap.

The survey by British Chambers, of more than 7,000 businesses, signals UK growth remained subdued in the fourth quarter. Official figures have shown UK growth was weak over the three quarters to September.

British Chambers noted nearly all services sector indicators were “below their pre-EU referendum levels”, with the “strong performance of manufacturers easing slightly in the final quarter of 2017”.

The business organisation concluded growth in the key services sector remained “muted”, and “below historic averages”.

The proportion of services firms that were confident turnover and profitability would improve over the next year decreased. And the proportion of services companies reporting improved cash flow remained low.

In manufacturing, the proportion of firms reporting improved export sales and orders in the final three months of last year was down slightly on the previous quarter.

British Chambers noted that, in the manufacturing sector, indicators for UK sales, employment expectations, recruitment, and confidence in increasing turnover on a 12-month view had also been lower than in the previous quarter.

The survey signals mounting inflationary pressures. Subtracting the proportion expecting to lower prices from that predicting a rise, a net 36 per cent of services companies projected an increase over the next three months. This is the highest such balance since the third quarter of 2008.

The balance of manufacturers predicting a rise in prices was 50 per cent in the fourth quarter, up from 35 per cent in the preceding three months and the highest since the closing quarter of 2016.

A net 25 per cent of manufacturers reported  higher export sales in the fourth quarter – down from 29 per cent and the lowest since the final three months of 2016.

Adam Marshall, director general of British Chambers, said: “While there are many business bright spots across the UK, the evidence from the biggest private business survey in the country shows that growth and confidence remain subdued overall as we enter a new year.

Labour and skills shortages are set to be the biggest potential drag anchor on business in 2018, since ultimately it is people that make businesses work.”

He added: “This must be the year employers act rather than just complain on skills, and the year government delivers clarity, leadership and investment in people and infrastructure. Kick-starting growth, and boosting wages and prosperity for all, depends on this.”

Suren Thiru, head of economics at British Chambers, said: “These results suggest that GDP growth remained underwhelming in the fourth quarter of 2017. Services sector activity remains subdued. Consumer-facing firms in particular are facing an uphill struggle due to negative real wage growth, which is continuing to stifle consumer spending.”

He added: “The set to continue on an underwhelming growth trajectory over the near term with uncertainty over the impact of Brexit coupled with high inflation and weak productivity likely to dampen overall economic activity.”