Optimism and output levels stall as businesses battle supply chain pressures

  • Despite marginal upticks in December, BDO’s Output and Optimism Indices remained well below historic levels as a result of rising inflation and supply chain pressures
  • The Employment Index approached a one-year low as businesses responded to the threat of a recession by reining in hiring intentions, which reached a two-year low
  • Inflation remains at its highest level since the early 1980s despite a second-consecutive decline in the Inflation Index

Low confidence and productivity among UK businesses continue to drive historic falls in hiring intentions, despite marginal improvements in December, according to the latest Business Trends report from accounting and business advisory firm BDO.

BDO’s Output Index increased by 0.08 points last month to 91.65, driven by a marginal uptick in productivity in the services sector. However, the index sits firmly below the 95-point mark overall, regarded as the watershed between growth and contraction, and December marked the index’s second weakest reading since March 2021 when the UK population was still facing COVID-19 restrictions.

The continued contraction in output growth – which stems back to July – was driven, in part, by a one-point decline to 93.77 in the Manufacturing Output Index, as global supply chain challenges – such as high energy prices, input material shortages and ongoing geopolitical events – put downward pressure on firms’ output.

BDO’s Optimism Index mirrored the slight increase seen in the Output Index, rising by 0.25 points to 91.89, which remains firmly in contractionary territory. This reflects the ongoing pessimism among the services sector fuelled by weakened output and a 9-month decline in the Manufacturing Optimism sub-index amid supply-side pressures.

December saw BDO’s Employment Index fall by 0.86 points to 110.99, its weakest reading since January 2022, as businesses respond to waning optimism and productivity growth. Fears of a recession and ongoing macroeconomic headwinds have eroded positive hiring intentions, which now stand at their weakest level since Q4 2020 when the economy faced a new wave of lockdown restrictions caused by the alpha variant of COVID-19.

The Inflation Index recorded a second consecutive monthly decline, falling to 117.91. The 0.52-point drop suggests the index has approached a turning point, as it stands at its lowest level since June 2022.

Despite this fall, inflation remains at highs not seen since the 1980s, when the lingering effects of oil price turmoil and mass industrial action from the previous decade were driving steep increases in inflation.

Peter Harrup, partner and head of East Anglia at BDO LLP, said:

“Although output and confidence levels grew slightly in December, the marginal upticks will do little to calm the nerves of UK businesses. Inflation and supply chain pressures are clearly being felt across the board, as employers pause recruitment plans and consider redundancies to manage rising costs.

“With an expected recession increasing pressure on the UK economy, firms will be looking for the right support from the Government as it works to encourage growth and confidence in the run-up to the Spring Budget.”

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