UK business confidence improves despite rising unemployment, BDO finds

As the UK transitions into a new government, businesses are exhibiting “encouraging” signs of optimism and potential recovery despite ongoing challenges, according to the latest Business Trends report from business advisory and accountancy firm, BDO.

The BDO Optimism Index is above the 100-mark for the second consecutive month, standing at 102.09 in June, down slightly from 102.30 in May.

This reflects continued positive sentiment among businesses, at levels last seen in mid-2022, when the post-pandemic optimism was being offset by the onset of conflict in Russia and Ukraine.

However, BDO’s Employment Index has declined for the 12th consecutive month, reaching 96.77 in June, signalling ongoing challenges in the labour market. This marks its lowest point since February 2013, when the UK labour market was still recovering from the Global Financial Crisis.

Economic consultancy firm Cebr has forecast the unemployment rate to peak at 4.6% in Q3 2024.

With UK economic activity expected to rise in the coming months, further significant increases in the unemployment rate are unlikely. But, the continued decline in the Employment Index underscores the harsh reality facing the new government.

Additionally, The Manufacturing Optimism Index rose marginally to 104.15 in June from 104.11 in May, marking its highest level since July 2022.

This increase reflects rising confidence within the manufacturing sector, bolstered by new orders despite the challenges of elevated input prices and tight financial conditions.

In contrast, the Services Optimism Index fell slightly to 101.83 in June from 102.07 in May, indicating persistent high services inflation, which stood at 5.7% as of May amidst elevated nominal wage growth.

Stable yet modest growth in business activity is seen in BDO’s Output Index which continues to stay within the 95-100 range for the fifth consecutive month, despite falling to 97.59 in June from 98.71 in May.

Rising new orders for the manufacturing sector are likely behind this, with wider growth weighed down by rising input prices and persistent tightness in financial conditions.

The BDO Inflation Index also rose to 97.72 in June from 97.30 in May, driven by the Input Inflation Index which increased to 92.26. Easing inflationary pressures and potential interest rate cuts are likely to stimulate economic growth in the coming months.

Kaley Crossthwaite, partner at BDO, said: “The prospect of ending months of political uncertainty clearly brought with it a jump in confidence among businesses, reaching levels we’ve not seen since the post-pandemic surge. But while optimism is high, employment falling for a 12th consecutive month highlights the stark reality of the economic challenges facing this new Government.

“Businesses need support to tackle significant challenges with initiatives that will drive economic growth and ensure employees have the necessary skills to thrive. With a new government, there is an opportunity to focus on programs that boost employment levels including making the apprenticeship levy more flexible to address workforce pressures.”