Continued strength across the UK services sector has driven increases in business output and optimism, according to the latest Business Trends report from accountancy and business advisory firm, BDO.
BDO’s Output Index reached an eight-month high of 99.80 in April, driven by a jump of 4.53 points across the Services Output Index as conditions across this sector improved. The sector last saw such an improvement in January 2022.
This growth was partially offset by a drop in the Manufacturing Output Index, taking it to 82.94, its worst performance in almost three years, since the early months of the pandemic.
Despite this, the overall Output Index now sits clear of the 95-point mark, the point of expansion, indicating growth in the economy in April.
It’s a similar story for BDO’s Optimism Index which has been buoyed by stronger-than-expected consumer activity and subsequent positivity across the services sector to reach its strongest reading since August 2022 at 98.22.
This is contrasted by the fall in optimism across the manufacturing sector, as businesses suffer from the effects of various economic headwinds including high input price pressures and ongoing supply chain disruption. These economic burdens caused a fall of 2.16 points for the Manufacturing Optimism Index – its lowest level since February 2021.
An overall stronger sentiment towards resilience in the UK economy reflects the ongoing decline in inflation as April saw the BDO Inflation Index dip to its lowest point in 18 months. The index now stands at 107.55 points as both input and consumer price pressures subsided.
The BDO Employment Index witnessed a third consecutive increase in April, driven by an uptick in the number of people in work, taking the Index to 111.07.
Whilst labour market conditions and growth prospects for the UK economy remain strong, higher interest rates are expected to weigh on economic activity and put upward pressure on the unemployment rate, with a peak of 4.3% forecasted for H2 2023.
Kaley Crossthwaite, partner at BDO LLP, said: “A tale of two sectors has emerged over the past few months as the resilience of the UK economy relies almost solely on the outlook for the improving services sector, as manufacturing businesses face an ongoing downturn.
“Supply side issues and energy price increases are expected to persist over the coming months and whilst there are signs that the worst may be over, particularly with input price inflation, this sector will need continued support to take the pressure off services.”
