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High borrowing costs and weaker demand are hitting UK business creation, prompting a fall in the number of enterprises that is adding to pressure on the stagnating economy.

The number of businesses set up in 2022 dropped 7 per cent to 337,000 compared with 2021, driven by sharp decreases in retail, couriers, real estate and construction, according to a Financial Times analysis of data published by the Office for National Statistics last week.

The figures, which were taken from the ONS-maintained Inter-Departmental Business Register, also showed a 5 per cent rise in the number of businesses closures, meaning they overtook creations for the first time since 2010.

The yearly data points to lower dynamism in the economy as fewer companies are left to provide jobs and boost output growth.

While larger businesses are generally more productive, new businesses are on average more creative and innovative, meaning that a fall in their number could translate into a drag on already sluggish UK productivity.

Tina McKenzie, policy and advocacy chair at the Federation of Small Businesses, said the figures were “a mirror to the economic challenges business faces today . . . from rising costs . . . to late payments and flagging consumer demand”.

The trend is confirmed by separate IDBR data published this autumn, which showed that the number of active businesses dropped in March 2023, the first fall since 2011.

According to separate quarterly figures, corporate insolvencies in England and Wales hit their highest since the 2008 financial crisis in the six months to September 2023.

IDBR data tracks all enterprises in the UK registered for VAT or PAYE. As a result, it does not include some businesses such as small, single-person, limited companies and some non-profit groups, as well as unregistered or inactive businesses.

Government support helped many businesses survive the Covid-19 pandemic, but a combination of high borrowing costs, strong wage growth, high energy and materials prices and weakening demand has made conditions harder since the end of 2021.

Meanwhile, a decline in household spending in the three months to September contributed to the stagnation of the economy.

Ashley Webb, economist at consultancy Capital Economics, said the “significant increase” in energy prices and tighter monetary policy meant setting up a business had become more expensive since the start of 2022, “particularly if they were financed through borrowing”.

Elevated interest rates — now at a 15-year high of 5.25 per cent — have curbed the availability of funding for companies, which flowed freely during a decade of nearly free borrowing until the end of 2021.

Neil Ross, associate director for policy at techUK, said there had been “big issues on the interest rate side, [with a] lack of funding. That’s been a big problem for getting early-stage companies off the ground.”

Dom Hallas, executive director at Startup Coalition, which represents tech businesses, said that although plenty of businesses were still being created, recent data was a reminder that start-ups could not be taken for granted.

“For a long time, I think there was a truism in British policy that ‘We’ve done startups now, we’re really good at that and now we need to do scale- ups’,” he said. “The reality is there are challenges all over the growth spectrum.”

According to the IDBR data, some sectors that are sensitive to interest rate rises, including construction and real estate, showed particularly big swings in business creations and closures. Last year, the number of new businesses in building construction dropped 8 per cent, while closures soared 41 per cent.

Richard Fleming, managing director at consultancy Alvarez & Marsal, said rising borrowing costs had led some investors to defer projects, heaping pressure on the sector. A cooling residential market had also hit regional housebuilders, he added.

The surge in new businesses during the pandemic, helped by new funding opportunities and the opening of new markets thanks to the shift online and hybrid working, registered an inversion last year.

For example, the number of new businesses operating in retail dropped from 38,900 in 2021 to 29,420 in 2022, the lowest since consistent data first became available in 2017. Meanwhile, closures in retail rose almost 30 per cent in 2022 to the highest in at least six years.

The number of new couriers also shrank by one-quarter in 2022, after doubling between 2019 and 2021.

Emma Jones, founder and chief executive of Enterprise Nation, a platform that supports small businesses, said she had witnessed a “huge boom” in business births during Covid as entrepreneurs “became alive” to gaps in the market.

But “it was inevitable that some of these would be impacted by . . . pressures like the cost of living crisis and . . . inflation”.