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14 Feb 2024

Businesses more optimistic as services sector continues to bounce back

Businesses more optimistic as services sector continues to bounce back
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The services sector drove an uptick in output and confidence for UK businesses in the first month of the year despite ongoing headwinds and a cooling labour market, according to the latest Business Trends report from accountancy and business advisory firm, BDO.

Services sector drives more hopeful start to 2024 as manufacturing struggles persist

BDO’s Output Index rose for the third consecutive month in January to 99.42, its highest level since July 2022 when inflation first started to embed into the economy.

The increase was driven by the Services Sub-Index which rose to 100.05, reaching its highest level since August 2022. This came as economic conditions showed signs of improvement, buoyed by rising consumer confidence, expectations of imminent interest rate cuts, and robust activity in global markets, notably in the United States, signalling that the UK economy is inching towards recovery.

Output in the Services Sub-Index currently sits 5.53 points higher than its Manufacturing equivalent, highlighting the strength in the services sector, which continued to experience a post-Christmas surge at the start of the year. In contrast, the manufacturing sector continues to grapple with challenges amidst tight monetary conditions, reflecting a broader struggle in this sector.

Both the Services Optimism Index, at 99.19, and the Manufacturing Optimism Index, at 97.71, experienced slight increases last month as businesses pinned their hopes on potential interest rate cuts and economic improvements. However, despite a cautious rise in optimism, the outlook for UK businesses still remains mixed amid conflict in the Middle-East, months of high borrowing costs and the ongoing impacts of the cost-of-living crisis on consumer spending.

Employment hits another 10-year low with uncertainty looming

In contrast, BDO’s Employment Index continued on its downward trajectory in January, falling for the seventh consecutive month to hit another decade low of 98.77 – its weakest reading since August 2013.

Similar to the years following the Global Financial Crisis, the UK economy is witnessing an environment characterised by declining hiring intentions. Cebr's projections show the unemployment rate climbing in the coming months, with peaks of 4.6% anticipated in both Q2 and Q3 of 2024.

More hopeful picture for UK businesses in coming months despite mixed outlook

Looking ahead, the uptick in Output over January marks the start of a gradual recovery anticipated for 2024. Economic consultancy Cebr expects its data to show that the UK was in a technical recession over the second half of last year, before recovering over Q1. With a projected 0.3% GDP growth anticipated in the first quarter of this year, we would expect to see a steady rise in the Output Index in the coming months.

January also marked a fourth consecutive drop in BDO’s Inflation Index, hitting a low of 97.86 from December's 98.38 points as inflation subsides. This plunge in inflationary pressure saw the Index reach its lowest reading since February 2021, when the economy was grappling with the aftermath of third national lockdown, with further declines expected on the Inflation Index moving forward.

Kaley Crossthwaite, Partner at BDO LLP, said: “It’s encouraging to see our resilient services sector spearheading some positive momentum in January. As businesses entered the beginning of 2024, they did so with a sense of cautious optimism.

“With Output expected to continue rising, recession easing and businesses hopeful of further interest rates cuts – businesses have started the year with a cautious optimism. But we can’t be complacent. While certain pressures are beginning to ease, demand hasn't quite regained its pre-pandemic vigour and these businesses will continue to need targeted support in the months ahead.”


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