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UK services sector shrinks for first time since 2010

05 August 2018

- BDO Output Index declines sharply for a second consecutive month

- Poor performance of UK services brings British business output closer to contraction -

- Despite declining performance, businesses are optimistic about the future -

The UK’s services sector has contracted for the first time in eight years, according to the latest Business Trends Report by accountants and business advisors BDO LLP.

BDO’s Services Output Index, which measures business output within the sector, plummeted to 94.73 in July from 96.85 the previous month. This decline marks the first time that the services sector has shrunk since February 2010, and pushes the UK’s largest sector beneath the 95.0 point of contraction.

With services accounting for 80 per cent of the value created by the UK economy, this finding paints a gloomy picture for the country’s economic outlook.

Output from manufacturing, the UK’s second largest sector, remains above the long-term growth trend of 100, recording just a small decline from 100.82 in June to 100.16 in July. This indicates a more positive period for manufacturers, with a third of businesses in the sector recording increased orders in the second quarter of the year1. However, manufacturing comprises less than one tenth of UK business and is struggling to keep output growth in the green.

The UK’s business output is at its lowest point in six years and also creeping closer to the point of contraction as Brexit paralysis takes its grip. BDO’s Output Index, which measures business output growth in the UK’s two largest sectors, fell to 95.34 in July from 97.29 in June. This marks a significant slide from this time last year, when output stood at 100.96.

These findings emerge against the Bank of England’s decision to raise interest rates by a quarter point to 0.75 per cent last week, putting rates at their highest level for almost a decade. 

Despite the fall in output, BDO’s latest report shows that firms remain resilient and are optimistic about the future. BDO’s Optimism Index, which shows how businesses expect output to develop in the next three to six months, increased for the second consecutive month from 101.85 to 101.96. This confidence was likely driven by rising employment figures, as well as the encouraging news in July for future UK and US trade. President Trump and the European Commission President Jean-Claude Juncker committed to reduce tariffs and non-tariff barriers on industrial goods, which is set to improve exporting conditions for UK firms.

Commenting on the Business Trends Report’s findings, Peter Hemington, Partner BDO LLP, said:

“Uncertainty about Brexit and the increasing possibility of Britain crashing out of the EU without a transition deal is discouraging businesses from investing in the UK, with a resulting drag on productivity. The Bank of England’s decision to raise interest rates was designed to reduce inflation but has been carried out during a period of immense fragility for British business. I would urge the Monetary Policy Committee to act with caution when it comes to the possibility of any further rate rises.

The government must also recognise the pressing need to protect Britain’s 26 million services sector workers as Brexit negotiations take place, particularly considering the UK has the highest share of services exports than any leading economy.”

 

To download BDO’s New Economy report and find out more visit www.neweconomy.bdo.co.uk  

 

- Ends –

 

1Figures from the Confederation of British Industry

Overview of the BDO indices:

An overview of all four indices is provided in the table below, detailing figures for the last three months and the same month of the previous year, to allow for comparison.

 

July 2018

(figures for this report)

June

2018

May

2018

July 2017

(equivalent report last year)

BDO Optimism Index

101.96

101.85

101.74

103.10

BDO Output Index

95.34

97.29

98.58

100.96

BDO Inflation Index

100.82

99.11

98.70

102.17

BDO Employment Index

113.55

112.85

111.81

111.46

 

Note to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world. 

Our clients are Britain’s economic engine – ambitious, entrepreneurially-spirited and high growth businesses that fuel the economy.  

We share our clients’ ambitions and their entrepreneurial mind-set. We have the right combination of global reach, integrity and expertise to help them succeed.  

 

Methodological notes

The BDO Monthly Business Trends Indices are prepared on behalf of BDO LLP by the centre for economics and business research ltd., a leading independent economics consultancy. Cebr has particular strengths in all forms of macroeconomic and market forecasting for the UK and European economies and in the use of business survey techniques.

The indices are calculated by taking a weighted average of the results of the UK’s main business surveys. It incorporates the results of the quarterly CBI Industrial Trends Survey (and the CBI Monthly Trends Enquiry which is carried out in the intervening months); the Bank of England Agents’ summary of business conditions; and the Markit/CIPS Manufacturing and Services PMI data.

Taken together the surveys cover over 4,000 different respondents from companies employing approximately five million employees. The respondents cover a range of different industries and a range of different business functions. Together they make up the most representative measure of business trends available.

The surveys are weighted together by a three-stage process. First, the results of each individual survey are correlated against the relevant economic cycles for manufacturing and services. This determines the extent of the correlations between each set of survey results and the relevant timing relationships. Then the surveys are weighted together based on their scaling, on the extent of these correlations and the timing of their relationships with the relevant reference cycles. 

Finally, the weighted total is scaled into an index with 100 as the mean, the average of the past two cyclical peaks as 110 and the average of the past two cyclical troughs as 90.

The results can not only be used as indicators of turning points in the economy but also, because of their method of construction, be seen as leading indicators of the rates of inflation and growth.

 

BDO LLP

BDO LLP operates in 18 offices across the UK, employing 3,500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP has underlying revenues of £428m and is the UK member firm of the BDO International network.

 

BDO’s global network

The BDO global network provides business advisory services in 162 countries, with 74,000 people working out of 1,500 offices worldwide. It has revenues of $8.1bn.  

 

Contacts

Alexander Dickie at Teneo Blue Rubicon on behalf of BDO LLP

Mob: 07876 287318
Tel: 0207 260 2700
Email: [email protected]