Optimism and hiring intentions rise as inflation shows early signs of falling

  • BDO’s Optimism Index rises to its highest point since August 2022 despite a decline in manufacturing and services output growth
  • The UK’s labour market sees fifth consecutive increase in BDO’s Employment Index amid stronger hiring intentions
  • BDO’s Inflation Index declines to its lowest point in almost two years as input price pressures begin to subside

UK businesses have shown stronger optimism and hiring intentions as inflation shows early signs of falling, according to the latest Business Trends report from accountancy and business advisory firm, BDO.

BDO’s Optimism Index reached a 10-month high in June, recording a 0.65-point increase to 100.40 and crossing the 100-point threshold which indicates above-average positivity.

Increases were driven by net-positivity across the services sector, which remains high at 100.67, and a return to improvement across manufacturing optimism which picked up by 1.00 point. Despite this, manufacturing optimism still sits in contractionary territory, below the crucial 95-point mark at 92.56, as businesses tackle ongoing supply side headwinds.

Stronger hiring intentions in June reflect the generally more positive outlook from businesses.  Buoyant employment levels drove a fifth-consecutive improvement in BDO’s Employment Index, as a 0.60-point increase saw the index rise to 111.96. Increases in the number of self-employed and part-time workers in June contributed to the resilience of the UK labour market.

Confidence from businesses has been buoyed by the expected easing of inflationary pressures in the coming months. June saw BDO’s Inflation Index record its weakest overall reading since August 2021, when the country was emerging from a third national lockdown, falling by 2.06-points to 103.68. Price pressures are predicted to subside for businesses in the coming months. However, higher interest rates will place further strain on households leading to more cautious consumer spending, despite inflation slowly easing.

Despite net growth across the Optimism and Employment Indices, supply chain pressures have dampened business productivity. BDO’s Output Index fell to 95.95, its weakest reading since March, indicating a slowdown in growth.

Both the Services and Manufacturing Output Subindices declined in June and whilst services remain in in positive territory at 97.78, manufacturing witnessed a larger fall of 3.19 points to a deeply negative reading of 81.52. This marks manufacturing’s worst output reading since May 2020 when manufacturing output was curtailed by the first national lockdown.

Peter Harrup, head of BDO in East Anglia, said:

“It’s encouraging to see business confidence and hiring intentions reflect the resilience we’re seeing and hearing from firms, in the face of ongoing supply side challenges.

“Whilst there’s hope that the new Ofgem price cap will drive down household energy prices and in turn ease inflation, the recent rise in interest rates and stagnating price growth indicate that this may still be a long way off.

“Firms will need a helping hand from Government with targeted policies or we risk business growth stagnating and plans for expansion falling through.”

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