Business confidence falls as economy slows

The latest Business Trends report from the accounting firm BDO reveals a fall in business confidence last month. Higher interest rates, weak global demand and a slowing UK economy all contributed to the first fall in hiring intentions in six months.

BDO’s Employment Index fell for the first time in six months as businesses reduced vacancies whilst battling higher interest rates, weak global demand, and ongoing supply difficulties. The number of vacancies fell by 85,000 in Q2, while pay growth cooled. This drop comes alongside a more pessimistic business outlook, highlighted by the Optimism Index falling in July for the first time in four months.

The 0.78-point downturn was driven by negative sentiment among manufacturers, who have been particularly exposed to elevated borrowing costs. These headwinds saw manufacturing optimism stand at 93.56, a fourth consecutive month below the crucial 95-point mark which divides expansion from contraction.

Whilst services optimism also declined by 1.10 point to 99.57 in July, the sub-index remains above the 95-point mark, indicating net-optimism across the sector despite the weaker reading. Further declines in both optimism and employment are expected with threats of a recession looming for Q4 and early 2024.

BDO’s Output Index revealed starkly contrasting stories for the manufacturing and services sectors. Manufacturing output dropped sharply to 77.26 – its weakest reading since May 2020, when the sector was curtailed by the first national Covid-19 lockdown.

However, a 5.22-point pick up in services output drove an overall improvement of the headline index to 96.15 in July. Output now remains just above the 95-point of contraction, indicating marginal growth.

July saw BDO’s Inflation Index fall by 2.72-points to stand at 100.96, its lowest reading in over two years. This decline is expected to mirror slows in consumer inflation driven by a drop in energy prices following Ofgem’s lower price cap. A fall was also observed in input price inflation reaching 91.01 reflecting the dropping prices in global commodity markets.

Kaley Crossthwaite, Partner at BDO said “A more pessimistic outlook from businesses and consequent loosening of the labour market are the first indicators of the slow in economic growth expected towards the end of the year.”

“With yet another hike in interest rates from the Bank of England last week, this downturn is only set to worsen in what should be a golden quarter for many, if more isn’t done to support businesses. To reverse these trends, Government needs to work more closely with industry to ensure firms of all sizes have tailored support in order to weather the storm, invest and grow.”