Business Trends

Output recovery runs out of steam as confidence remains subdued

• BDO’s Output Index hits five-plus year low as slowdown spreads across manufacturing and services
• Optimism Index remains below trend for 20th consecutive month as businesses delay investment and hiring

A new report shows UK business activity dropped sharply in June as temporary improvement seen earlier this year ran out of steam. Weaker consumer demand, subdued business confidence and rising cost pressures combined to slow momentum, according to the latest Business Trends report.

BDO's Output Index fell to 91.53 in June, down from 94.80 in May, its lowest reading since February 2021 when the UK was experiencing its third COVID lockdown. The decline reflects weakening activity across both services and manufacturing, signalling an increasingly broad-based slowdown.

The services sector was the biggest drag on activity, with the dedicated Services Output Index falling to 91.04, as fragile consumer confidence and delayed spending weighed on demand. Manufacturing softened even more from 99.31 in May to 95.39, suggesting the resilience driven by precautionary stockpiling and frontloading of orders across Q2 is beginning to unwind.

Business confidence showed little sign of recovery in June, with the Optimism Index remaining below the 95-point threshold that separates growth from contraction for the 20th consecutive month. While sentiment has stabilised, businesses continue to face higher operating costs and rising household energy bills from July onwards will likely have knock-on effects for discretionary spending.

Alongside ongoing geopolitical uncertainty, these cost pressures are expected to weigh on businesses’ spending, investment plans and confidence, with BDO’s Inflation Index now at its highest in over three years (102.70).

Until confidence begins to recover, BDO’s Output and Employment Indices are both likely to remain subdued. The Employment Index, a combination of hiring intentions, headcount and labour demand, held broadly steady at 93.08, remaining just above last month's 15-year low. This paints a picture of businesses caught in wait-and-see mode as they manage costs and preserve flexibility while waiting for greater economic certainty.

Scott Knight, Head of Growth at BDO, said: "Business confidence has remained low for 20 consecutive months as businesses are trapped in survival mode. Rebuilding confidence will need to be tackled immediately by the next Prime Minister if the UK is to return to growth.”