Latest lows for services sector as output and optimism crash
Latest lows for services sector as output and optimism crash
- Subdued services sector sales pipelines and fragile client confidence lead to dip in business output and optimism
- Employment Index edges down even further to fresh 15-year low as businesses cautious on hiring
- May marks 10-years since the Brexit referendum, with business optimism having spent nearly a third of last decade in decline
UK services sector activity fell sharply in May, pushing business output and optimism to new multi-year lows as continued conflict in the Middle East weighed on the UK economy, according to the latest Business Trends report from accountancy and advisory firm BDO LLP.
BDO’s Output Index, which reflects economic activity in the UK, fell from 102.48 to 93.96 in May, largely driven by subdued sales pipelines and fragile client confidence in the services sector. This drop reverses an uptick in the Output Index last month, when businesses were likely frontloading orders while faced with the prospect of continued uncertainty.
The data suggests the manufacturing sector continued to stockpile inputs and inventory in May, with the Manufacturing Output Index holding steady at 101.56. In contrast, BDO’s dedicated index tracking output in the services sector reached its lowest point since the UK emerged from the third national lockdown in 2021 (93.00). This demonstrates the extent of this month’s slowdown as activity declined in the hospitality, leisure and travel industries, likely due to delayed spending decisions around travel and broader cuts to discretionary spending as the current climate squeezes real wage growth.
As a result of continued uncertainty, BDO’s Optimism Index also fell from 92.37 to 88.36 in May, marking its 19th consecutive month in contractionary territory and underlining the persistent fragility of business confidence especially in the services sector. The deterioration in sentiment reflects a gloomy economic outlook as the prospect of rising prices stemming from the Middle East conflict weighs on weak growth and prolonged geopolitical uncertainty.
Marking 10 years since the Brexit referendum, analysis shows the Optimism Index has spent nearly a third of the last decade in decline as a result of a successive shocks including the Covid-19 pandemic and Ukraine war.
Meanwhile, the Employment Index, which accounts for hiring intentions, headcount and labour demand, edged down further to a new 15-year low. The services sector contributed to this decline, as business saw a continued lack of pressure on demand and limited near-term hiring needs.
Scott Knight, Head of Strategy at BDO, said: “As expected, the signs of a short-term recovery in April were not a true reflection of the state of the economy. As the impact of ongoing conflicts and domestic uncertainty filters through, businesses, particularly those in the services sector, are bracing for further cost pressures. Hopes for growth are dimming.
ENDS
Overview of the BDO indices
An overview of all four indices is provided in the table below, detailing figures for the last four months to allow for comparison. 100 = average value. Above 95 = positive. BDO’s Business Trends comprises multiple surveys covering 4,000 respondents. Further information on inputs and the data included is available on request, but please note the ONS Labour Force Survey is not one of them.
Both BDO's headline Output and Optimism Indices are built from separate Manufacturing and Services sub-indices, combined in line with each sector's share of UK GDP. The Output sub-indices gauge sector activity against its long-run trend, drawing on business surveys, trade and exchange-rate indicators, and Cebr's own output estimates. The Optimism sub-indices follow the same structure but focus on business confidence and turnover expectations.
| May 2026 | April 2026 | March 2026 | February 2026 | January 2026 | |
|---|---|---|---|---|---|
| BDO Optimism Index | 88.36 | 92.37 | 91.83 | 93.45 | 90.04 |
| BDO Output Index | 93.96 | 99.64 | 96.74 | 97.45 | 97.11 |
| BDO Inflation Index | 102.15 | 101.36 | 99.30 | 98.51 | 99.73 |
| BDO Employment Index | 93.06 | 93.08 | 93.28 | 93.30 | 93.30 |
Note to editors
BDO LLP operates in 17 offices across the UK, employing 8,000 people. It has UK revenues of £1bn.
It provides Audit, Tax, Deals, and Consulting, Risk & Outsourcing services predominantly to the entrepreneurial, ambitious and growing mid-sized businesses that are driving growth in the UK economy. BDO calls this segment of the market the UK’s economic engine.
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