Business confidence hits two-year low

Business optimism in the UK reached a two-year low in January, according to analysis by BDO. The firm’s index measuring confidence across British manufacturing fell to 92.20 from 93.41 in December, marking the fourth consecutive month of decline and the lowest level since January 2023, a time marked by double-digit inflation and clear signs of economic stagnation in the UK.

While business optimism generally tends to be lower at the beginning of the year, with the festive period usually followed by a general decline in consumer spending, several additional factors likely contributed to this year’s drop in business confidence. The Manufacturing Optimism Index saw the sharpest decline, with a new year drop to 92.56, down from 96.12 in December. This significant fall reflects reduced near-term hiring expectations driven by persistent inflation, anticipated increases in employment costs (including National Insurance Contributions) and uncertainty over global trade weighing on manufacturers.

The Service Optimism Index also decreased from 93.07 in December to 92.16 in January as a result of declining hiring intentions.

Weak economic activity, persistent inflationary pressures and poor business confidence caused the Employment Index to fall to 94.72 and officially enter contractionary territory, meaning weaker-than-average hiring activity across the board, with businesses slowing recruitment and/or cutting jobs, for the first time in well over a decade.

The Employment Index has generally been on a downward trajectory since June 2023 as hiring intentions stalled. It last recorded a similar reading in November 2012 when the UK labour market was still recovering from the Global Financial Crisis.

The reduction in hiring intentions among employers in both manufacturing and services is expected to persist throughout the year, with export-oriented businesses and retail and hospitality expected to be most adversely affected. Economic consultancy Cebr predicts as part of this report that the unemployment rate will rise throughout the year, peaking in Q3 at 4.7%.

However, despite the ongoing challenges, there are pockets of optimism for 2025. The latest Business Trends report forecasts a growth rate of 1.1% for this year, marking an acceleration from 2024 and demonstrating the resilience of UK companies navigating a demanding business environment.

Kaley Crossthwaite, Partner at BDO, said “The new year is often time for a refresh, but businesses across the UK are continuing to face challenges that have weighed on them for months. Despite these external pressures, UK plc and the mid-market in particular, continue to demonstrate their appetite for growth. We know these companies are resilient and adaptable but they are not invincible: our report shows that supporting growth and addressing workforce challenges need to be a key priority for the year ahead.”