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.
Kyla Bellingall, regional managing partner at BDO in the Midlands, 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.”
