Business optimism flatlines as output and employment slump

Output saw significant declines in January driven by falling consumer demand across the services sector
Business optimism remained effectively static as service sector pessimism battles with renewed optimism from manufacturing businesses thanks to waning input price pressures
Employment Index falls to lowest point in over a year as hiring intentions drop amid rising inflation and economic headwinds

Business optimism stagnated in January as output significantly declined and firms cut back on hiring staff, according to the latest Business Trends report from accountancy and business advisory firm BDO. For the third time in just six months, all four of the Indices tracked by the report - Output, Optimism, Employment and Inflation – fell simultaneously.

BDO’s Output Index which tracks economic growth, experienced a sharp decline for the fourth consecutive month, as a 3.45-point fall brought it down to 89.15, remaining well below the crucial 95-point threshold between expansion and contraction for the second consecutive month.

This overall decline in output was driven largely by the Services Output Sub-Index which registered a 3.85-point dip in January as the cost-of-living crisis weakened consumer spending and demand across the services sector. This marks its lowest level since March 2021 when the economy was about to reopen following the third national lockdown of the COVID-19 pandemic.

Dips in services productivity were also reflected in optimism across the sector. The Services Optimism Sub-Index fell by 0.23 points in response to inflationary pressures expected to heighten economic pressures facing businesses in the coming months.

In contrast, January saw the Manufacturing Optimism Sub-index end nine consecutive months of decline, increasing by 0.25 points. Diminishing input price inflation slowed declines across manufacturing output for the first time in four months – bolstering business confidence across this sector.

However, this turning point wasn’t enough to outweigh the net-pessimism across the services sector which led to an overall dip of 0.01-points in BDO’s Optimism Index to stand at a 91.88, remaining in negative territory for the fourth consecutive month.

Responding to the net declines across Optimism and Output, BDO’s Employment Index fell to its lowest reading since December 2021. Weakened hiring intentions led to a drop of 1.02-points as firms expect to cut back on plans for recruitment in the months ahead.

BDO’s Inflation Index witnessed a significant 3.75-point drop as it fell to 114.16, its lowest point since March 2022. The gradual easing of price pressures has marked a shift across the Input Inflation and Consumer Inflation indices driven by recent falls in wholesale energy prices. Despite this fall, inflationary pressures remain historically elevated.

Kaley Crossthwaite, Partner at BDO said:

“A net decline across the Optimism, Output and Employment Indices, coupled with historically high levels of inflation, suggests the outlook still remains bleak for businesses, with hiring intentions at their lowest levels in over a year and ever-increasing economic headwinds driving threats of a recession.

“With a new Department for Business and Trade in place and a Spring Budget on the horizon, there is space in Government to consider how best to offer firms a helping hand. Businesses need the right support in place to ensure they can weather the challenges ahead and focus on continuing to drive the growth of the UK’s economy.”

- ENDS

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. 100 = average value. Above 95 = positive.

	January 2023 (Figures for this report)	December 2022	November 2022	January 2022
BDO Optimism Index	91.88	91.89	91.64	104.91
BDO Output Index	89.15	92.60	95.35	122.09
BDO Inflation Index	114.16	117.91	118.43	106.75
BDO Employment Index	109.97	110.99	111.85	109.98

Note to editors

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

The organisations we work with are Britain’s economic engine –entrepreneurially-spirited, high-growth businesses that fuel the economy.

We understand the ambitions and entrepreneurial mindset of those we work with and have the global reach, integrity and expertise to help people and businesses succeed.

BDO LLP
BDO LLP operates in 17 offices across the UK, employing 7000 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network
The BDO global network provides business advisory services in 164 countries and territories, with 111,300 people working out of 1,803 offices worldwide. It has revenues of US$12.8bn.

Business Trends
BDO’s Business Trends is the ‘poll of polls’ regrouping data from the UK’s main business surveys, calculated by taking a weighted average of the results.

BDO’s Employment, Inflation, Optimism and Output Indices are 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, the Markit and Chartered Institute of Purchasing and Supply’s (CPS) Surveys of Manufacturing and of Services; the DG ECFIN industrial and services confidence indices; the RICS construction market survey; the Manpower Employment Outlook Survey; and Eurostat’s monthly business surveys.

Taken together the surveys cover over 4,000 different respondent companies, covering a range of different industries and business functions. Together, they make up the most representative measure of business trends available.

Contacts

Ella Hatfield
Email: ehatfield@headlandconsultancy.com
Tel: +44 (0)77 9868 7042

BDO Press Office
Email: media@bdo.co.uk