Turning point on the horizon for UK economy as services and manufacturing outlook improves
Turning point on the horizon for UK economy as services and manufacturing outlook improves
- Services and manufacturing sectors drive fourth consecutive month of recovery for BDO’s Output Index – reaching its highest level since July 2022
- Small uptick in business confidence as inflationary pressures ease, but outlook for UK businesses remains uncertain
- Employment Index falls for eighth consecutive month, indicating high interest rates and weak demand conditions continue to undermine hiring intentions
UK business output and confidence grew in February as hiring intentions continued to decline to a new decade low, according to the latest Business Trends report from business advisory and accountancy firm, BDO.
BDO’s Output Index climbed for a fourth consecutive month to 99.99 as a result of improvement across services and manufacturing– two of the UK’s major sectors. This is the index’s highest reading since July 2022, when supply chain pressures, weakening consumer spending power and elevated costs weighed on activity among both services and manufacturing businesses.
The Services Output Index rose by 2.1 points to 100.01 in February, crossing the 100-point mark, which indicates a strong trend of growth. Its counterpart, the Manufacturing Output Index, also improved, recording a reading of 99.76, though this remains below the 100 mark. This comes as a result of material costs gradually easing as corroborated by the Inflation Index.¹
In a sign of business confidence improving, the Optimism Index rose to 99.49 last month from 99.03. This was driven primarily by a more positive outlook among manufacturers, with capital-intensive businesses expecting both interest rates and high operating costs to ease in the coming months. The Manufacturing Optimism Index recorded a 1.51-point increase to 99.22, a 13-month high last surpassed in January 2023, while the Services Optimism Index rose by 0.33 points to 99.52.
The Inflation Index recorded its fifth consecutive month of decline to 97.05, its lowest reading since February 2021 before international conflict caused wholesale energy prices and inflationary pressures to spike. Economic consultancy CEBR anticipates inflation will drop below 2% in April and this is corroborated by forecasts published by the Office for Budget Responsibility (OBR) as part of this week’s Spring Budget.
The overall drop in February was partially driven by the Input Inflation Index falling to 91.25, and has remained in contractionary territory (i.e., below the 95-point mark) since June 2023. This tracks non-labour costs for businesses, such as raw material prices, and reflects recent falls in input prices, including commodities such as gas. Further declines in the Inflation Index are predicted over coming months as a result of the energy price cap decrease, which is expected in April. However, low customer demand remains an issue for businesses and reduces the likelihood of imminent, large increases in confidence levels.
Hiring intentions remain at their weakest level for over a decade, despite improved outlook
Despite better sentiment and output among businesses, BDO’s Employment Index fell for the eighth consecutive month to 98.54, a new more than a decade low not seen since July 2013.
The Employment Index suggests that high borrowing costs and low customer demand could be behind consistently low hiring intentions and open vacancies from businesses.
Kaley Crossthwaite, Partner at BDO, said: “It’s heartening to see signs of recovery from our resilient services and manufacturing sectors after a tough period of high interest rates and lower demand. Businesses are responding to gradually improving economic conditions, but they remain cautious, particularly when it comes to hiring.
“While the budget may help tackle sluggish consumer demand in the services sector, businesses will need continued support from the government if they are to continue playing their part in the recovery of the economy.”
ENDS
Overview of the BDO indices:
An overview of all four indices is provided in the table below, detailing figures for the last three months and the same month of the previous year, to allow for comparison. 100 = average value. Above 95 = positive.
BDO’s Business Trends is a ‘poll of polls’ and comprises multiple surveys covering 4,000 respondents. Further information on outputs is available on request, but please note the Labour Force Survey is not one of them.
| February 2024 (Figures for this report) |
January 2024 |
December 2023 |
February 2023 |
|
| BDO Optimism Index | 99.49 | 99.03 | 98.44 | 97.36 |
| BDO Output Index | 99.99 | 98.09 | 95.89 | 96.09 |
| BDO Inflation Index | 97.05 | 97.86 | 98.38 | 113.18 |
| BDO Employment Index | 98.54 | 98.77 | 99.12 | 110.18 |
1. ONS, Producer Price Inflation: January 2024 data, February 2024