Services sector keeps UK output growing as business confidence continues to fall

• BDO’s Output Index ends 2024 in stronger position than start of the year thanks to resilient services sector
• Employment hits new 12-year low with weakest Index reading since December 2012, amidst declining job vacancies and payrolled employees
• Rising inflation and increasing employment costs continue to dampen business confidence

The BDO Output Index - which measures output across two major sectors, manufacturing and services – ended 2024 in a stronger position than at the start of the year despite a challenging economic climate.

In 2024, easing inflationary pressures and a gradual loosening of monetary policy led to a moderate improvement in UK output, with the Index demonstrating an overall positive value across the course of the year. Despite this, BDO's Output Index experienced a slight decline in December, falling to 97.68 from 97.91 the previous month. This was primarily due to the manufacturing sector grappling with weak domestic market sentiment, poor export sales and a restructuring of operations ahead of increases to employer National Insurance contributions (NICs) and the National Living Wage (NLW) later this year.

The Output Index was prevented from falling further by a stronger performance amongst businesses in the services sector. The Services Output Sub-Index rose from 95.03 to 98.75 in December, marking its highest reading of the year, due to an uptick in business activity.

However, inflation and rising employment costs caused business confidence to continue to fall in December from 94.66 to 93.41. This follows a sharp fall in the Optimism Index in November, as businesses reacted to the employment measures announced in the Budget. Current levels of optimism are comparable to those observed in late 2022 and early 2023, when headline inflation was around 10% and the economy was nearing a period of contraction.

The Employment Index hit a new 12-year low in December, with its weakest Index reading since 2012, amidst declining job vacancies and payrolled employees. Looking ahead, hiring intentions are expected to decline further as businesses adjust to increased NICs and wage growth, which is likely to cause the Employment Index to fall again during early 2025. However, interest rate cuts may help alleviate some of this pressure.

Inflation is also expected to persist and continue weighing on business confidence throughout 2025, with poor growth prospects remaining a risk. Nevertheless, optimism may start to rise again gradually over the coming months, as interest rates fall and businesses adjust to new policies from the Budget coming into effect.

Kaley Crossthwaite, Partner at BDO, said: “2024 was a turbulent year with significant changes to the business landscape. As this environment continues to evolve with the introduction of new policies, unstable inflation and a loosening of the employment market, businesses continue to do their best to adapt and keep pace with the challenges thrown at them.

“The Government needs to create a stable operating environment with targeted support to drive growth in 2025.”

Download December 2024 report

The chart below shows a sample of recent data from the Business Trends report. Any scores below 95 represent a contraction or a negative growth rate.

What is Business Trends?

The Business Trends report is one of the key monthly indicators of the performance of the UK economy, and provides an accurate and up-to-date picture of the environment that businesses are facing.

Business Trends covers more than 4,000 respondents from companies employing approximately five million employees across the UK. The report includes separate indices for services and manufacturing sector optimism and output, as well as indicators for UK inflation and employment.

Since 1992, the BDO Business Trends report has provided the most representative monthly measure of business output and optimism available. The results can be used as indicators of turning points in the economy as well as, because of their method of construction, leading indicators of the rates of inflation and growth.

See a sample Business Trends report

How is Business Trends prepared?

Indices are prepared on behalf of BDO LLP by the Centre for Economics and Business Research (CEBR), a leading independent economics consultancy.

Survey's contributing to Business Trends

Four indices covering output, optimism, inflation and employment, are calculated by taking a weighted average of the results of the UK's main business surveys, including:

• CBI Industrial Trends Survey
• CBI Monthly Trends Enquiry
• Bank of England Agents' summary of business conditions
• Markit/CIPS Manufacturing and Services PMI data

Taken together, these surveys cover more than 4,000 different respondents from companies employing approximately five million people in the UK. Collectively, they comprise the most representative measure of economic indicators and business confidence available. The respondents cover a range of different industries and business functions to deliver a comprehensive picture of the general economic outlook.