Cost-of-living crisis drags business optimism to 12 month low
- BDO’s Optimism Index plummets to lowest point in 13 months
- Businesses view inflationary pressures and supply chain disruption as a long-term threat
- Employment market remains resilient reaching a more than three-year high
Business optimism has fallen to its lowest level since April 2021 as firms grapple with mounting economic headwinds. The worsening cost-of-living crisis has been compounded by skyrocketing inflation and disruptions to global supply chains, weighing the BDO Optimism Index down by 4.82 points to 101.93.
May marked the index’s second consecutive month of decline, pushing it to its lowest point since April 2021, when coronavirus restrictions were being relaxed.
This downfall was primarily driven by the services sector, which has felt the full force of consumers tightening spending on non-essentials. BDO’s Services Optimism Index fell by 5.35 points to 100.95 in May and now sits just above the 100-level which denotes long-term average growth.
The cautious outlook from businesses is consistent with output declines, as mounting economic challenges place downward pressure on manufacturing and services sector output. The BDO Output Index fell by 1.86 points in May to 100.53 - its lowest reading in 14 months.
BDO’s Employment Index shows that employment levels are bucking the trend , reaching a three-year high of 113.89in May and now firmly exceeds its pre-pandemic level. The labour market has been bolstered by a low unemployment rate, which dropped in Q1 to its lowest reading in 50 years. However, employment is set to weaken in the medium term, reflecting the expected economic slowdown.
Commenting on the results, Kaley Crossthwaite, Partner, said: “The fact that business optimism is now at the same level it was more than a year ago while the country was still experiencing coronavirus restrictions paints a worrying picture for the UK economy. Weakened consumer spending power is undoubtedly weighing heavily on businesses and will continue to curtail growth in the months ahead.”
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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.
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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.