Half of small businesses do not expect to grow over the coming year as confidence plunges and insolvencies spiral, lobbyists have warned.

Spiralling costs are eroding margins at an unprecedented rate, while staff shortages are dragging on growth, according to a survey by the Federation of Small Businesses (FSB). 

The FSB said that the majority of small companies were operating below capacity and were considering axing their overseas operations amid an abundance of cost pressures. 

Economists last week warned that Britain is “teetering on the edge of a recession” as inflation soars, following the hit from coronavirus and amid Vladimir Putin’s war in Ukraine. Last Friday, sterling lost 1.3pc against the dollar to trade at $1.29 – its weakest level since late 2020 – adding to inflationary pressures. 

While the FSB’s small business index stood at +15.3, meaning more companies expected to grow than contract during the first quarter of this year, the reading still came in 12 percentage points lower than the same period in 2021.

The findings came as corporate insolvencies more than doubled to 5,000 across England and Wales during the first three months of 2022 amid the toxic business conditions.

Martin McTague, the national chairman of the FSB, said policymakers should be doing all they can to encourage start-ups after the business community shrunk “to the tune of hundreds of thousands” during the pandemic. 

“As things stand, spiralling costs are eroding small business margins at a rate that many have never experienced before, whilst workplace absences are making it hard to operate at full capacity in a tight labour market,” Mr McTague added. 

“At the same time, new paperwork and supply chain disruption are weighing on our importers and exporters, and an endemic poor payment culture continues to destroy thousands every year.”

The FSB’s findings were the latest in a slew of gloomy economic data that paints a picture of an economy heading towards a recession.