Thursday, December 7, 2023

Recession marks turning point for buoyant UK labour market

The UK labour market is set to see an end to its 10-month streak in positive hiring intentions following a dip in productivity and growing recessionary fears according to the latest Business Trends report from accountancy and business advisory firm, BDO.

BDO’s Employment Index has seen an increase each month since October 2021, increasing 0.53 points to 115.33 in August. This was driven by record payroll numbers and has been reflected by the ONS unemployment figure which sank to 3.6 percent in the three months to July, its lowest point since 1974.

The labour market now sits at a turning point, however, with recessionary fears expected to put downward pressure on employment as businesses exercise caution in the coming months. Official data has started to reflect this with hiring intentions falling for the first time since August 2020.

Whilst employment continues to show resilience, BDO’s Inflation Index soared to an all-time high of 119.05 in August, its highest reading since the first Business Trends survey was first published in 1992. This was driven by a 1.15-point rise in the Consumer Inflation Index to 117.41, following a drastic rise in energy prices.

A combination of these soaring energy costs and inflationary pressures, coupled with input shortages, have led to a decline in business output and productivity. BDO’s Output Index fell to its lowest level since the third national lockdown to 95.66. Further pressure on the index is expected to take the reading below the 95-point mark – regarded as the point of contraction – signalling a recession on the horizon as production slumps and the threat of recession looms.

Mounting economic headwinds and the drop in productivity have driven a decline in business confidence with BDO’s Optimism Index falling for its fifth consecutive month to 100.80. This fall has been caused by a drop in the Services Optimism Index which, following a slump in consumer demand, now sits just above the point of contraction at 95.76.

However, the overall economic environment in the face of a recession, is expected to remain far stronger than during previous downturns. The unemployment rate is predicted to rise to 4.1% by the end of this year before peaking at 4.6% in Q2 2023 – much lower than the 7.9% recorded in the period¹ immediately after the global financial crisis.

Kaley Crossthwaite, Partner at BDO LLP, says:“We’re already seeing the impact of a challenging environment, with many businesses forced to make cuts and – in some cases – consider whether the business will continue to be viable.

“Soaring energy costs and inflationary pressures are headwinds we can expect to become more severe in the coming months, exacerbating the economic and political uncertainty both firms and consumers feel this winter – particularly as we await the first signs of a fall in employment figures and a recession approaches.”

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