Services sector growth boosts business confidence as manufacturers battle supply-side pressures

• Growth in services output reaches ten-month high driving improvement in BDO’s Optimism and Output Indices while manufacturers battle high costs and ongoing supply chain challenges 
• Inflation Index falls for seventh consecutive month thanks to stronger value of sterling and declining wholesale energy prices 
• Overall uplift in business outlook prompts fourth consecutive monthly increase in the Employment Index

A ten-month high in service sector output delivered a boost in confidence for businesses in May while recruitment activity remained resilient, according to the latest Business Trends report from accountancy and business advisory firm, BDO. BDO’s Optimism Index grew for the second consecutive month to 99.75, increasing by 1.53 points to its highest reading since August 2022, when concerns of a recession first set in. 

However, there is a stark divergence between confidence in the services and manufacturing sectors. The Services Optimism Index drove the overall increase in business confidence, and remained in expansionary territory, which indicates growth, for a fourth consecutive month at 100.79 points. This marks the strongest reading for services optimism since July 2022, when the sector experienced a decline across recruitment activity which dampened its outlook. 

Meanwhile, the Manufacturing Optimism Index continued its path of decline with a reading of 91.56, its lowest point since February 2021 when the UK economy was in the middle of its third national lockdown. 
This negative sentiment amongst manufacturers was prompted by a second month of decline in the Manufacturing Output Index, which fell to 84.71 points. Supply chain pressures, such as high costs, distribution network disruption, and material shortages caused by Russia’s war in Ukraine resulted in its poorest reading since June 2020, when the country was emerging from its first national lockdown during the COVID-19 pandemic. 

In contrast, BDO’s overall Output Index recorded its highest reading in ten months at 99.65 points and has now exceeded the 95-point mark which divides expansion from contraction over five consecutive months. As with optimism, this improvement continues to be powered by the services sector, with the Services Output Index increasing by 1.02 points to 101.55. This was thanks in part to resilient consumer spending on non-essential goods or services, such as recreation and culture, despite the ongoing cost-of-living crisis. 

The seventh consecutive monthly decline in the Inflation Index suggests conditions could improve for manufacturing businesses in the coming months. The index now stands at 105.74, its lowest level since September 2021, due in part to a slowdown in wholesale energy price rises as well as Ofgem’s latest price cap announcement, limiting average estimates of household energy prices to £2,074 from July. 

A rally in the value of sterling, which had been pushed down after the Truss Government’s mini-budget in September 2022, also contributed to a fall in the Inflation Index, which is predicted to continue its downward trajectory for the rest of the year as cost pressures ease.

Rising for the fourth consecutive month, the Employment Index’s 0.29-point increase to 111.36 reflects the improving outlook across the Output, Inflation and Optimism Indices. Strong hiring intentions drove an uptick in the index, as a wave of part-time and self-employed workers re-entered the labour market in May. 

Kaley Crossthwaite, Partner at BDO LLP, said:

“Recessionary fears were at their peak only months ago, but slowing inflationary pressures are giving businesses and their customers cause for cautious optimism. However, it remains concerning to see the growing gap between the manufacturing and services sectors when it comes to business output and confidence, which could be further entrenched by ongoing supply chain challenges.

“All firms face a reckoning with ongoing supply-side headwinds and policymakers must hear concerns voiced around the regulation, incentives or tools businesses need. They must be willing to help them tackle the barriers they face in the UK, to allow businesses to achieve the growth they are capable of driving.”

ENDS

willing to help them tackle the barriers they face in the UK, to allow businesses to achieve the growth they are capable of driving.”

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.

	May 2023 (Figures for this report)	April 2023	March 2023	May 2022
BDO Optimism Index	99.75	98.22	97.09	101.93
BDO Output Index	99.65	99.03	95.31	105.64
BDO Inflation Index	105.74	107.55	110.99	116.25
BDO Employment Index	111.36	111.07	110.35	113.89

 

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 18 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, with 95,000 people working out of 1,713 offices worldwide. It has revenues of $11.8bn.
 
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, and make up the most representative measure of business trends available.

Contacts    

Email: media@bdo.co.uk 
 
Ellie Chatterton
Email: echatterton@headlandconsultancy.com
Tel: +44 (0)75 5117 1933
 
Verriin Kaur
Email: vkaur@headlandconsultancy.com 
Tel: (+44) (0)7786 767582