Business Trends
Business Trends
UK recovery leans heavily on services sector while employment stays near thirteen year-low
- Resilient services sector boosted UK business output in May as manufacturing output declined
- Business confidence edges up but still fragile amid cost pressures
- Output Index still weak compared to levels seen over the last five years, keeping the Employment Index near its thirteen year-low
A rebound in business output and confidence in May was driven almost entirely by the services sector as the Employment Index stayed at a near-thirteen-year low, according to the latest Business Trends report.
Despite persistent pressures from employment costs and global uncertainty, the BDO Output Index rose to 95.55 in May, up from 95.19 in April. Growth was concentrated in the services sector, where output climbed to 95.51, offsetting a contraction in manufacturing output.
However, both sectors continue to show underlying resilience. Some firms cite upticks in export demand from Asia and Europe, while recent interest rate cuts in May may also be providing support to domestic activity. The coming months are likely to support further momentum, particularly in the services sector, amid increased chances of a hot UK summer according to the Met Office.
Business confidence also improved in May, though it remains low compared to historic averages of the last 25 years and against pre-pandemic levels. The BDO Optimism Index rose to 92.30, up from 91.36 in April. Positive signals from May’s UK–US trade deal may have contributed to the uplift in sentiment, but business confidence was prevented from improving further by continued uncertainty around trade policy, high operating costs and fragile consumer demand.
Hiring also remains notably weak. While the pace of decline appears to be slowing, the Employment Index, which measures UK businesses’ hiring intentions and confidence in the labour market, stayed close to its lowest level in over a decade with a reading of 94.32. This is comparable to mid -2012, when the UK was still emerging from the financial crisis.
Structural domestic pressures, including employer National Insurance Contributions and the National Living Wage, are likely to continue weighing on employment growth and limit the scope for increased recovery in the Employment Index.
Overall, business confidence is expected to remain under pressure as firms navigate the combined headwinds of elevated inflation from input and consumer price increases, geopolitical risks and slow recovery in the labour market over the coming months.
Scott Knight, Head of Growth at BDO, said, “The services sector is performing well, but it can’t do all the heavy lifting. Outlook for UK businesses is fragile, not least in employment which is still at a near-decade low. Businesses need clarity, stability, and tangible actions on employment from the government to encourage the creation of new jobs rather than increase the cost to business of new hires.”
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.