UK business output and confidence rose in April despite the continued decline of hiring intentions and inflationary pressures, according to the latest Business Trends report from business advisory and accountancy firm, BDO.

BDO’s Output Index rose by 2.09 points to 103.92 in April. This marks its highest level since May 2022, when a gradual return to normal trading conditions following the Covid-19 pandemic lockdowns supported an uptick in growth.

This was driven largely by the services sector with the Services Output Subindex increasing sharply by 3.15 points to reach 104.84. 

Businesses monitored by this subindex include hospitality, retail and leisure firms, which have experienced better trading conditions as costs including energy bills declined. Falling consumer price pressures are enabling more spending on these services, which is likely to continue as weather conditions improve for Spring and Summer.

Inflation Index contracts for first time since 2021 despite tighter monetary conditions weighing on costs

Although the Manufacturing Output Subindex fell to 96.64 as a result of tighter monetary conditions weighing on manufacturers’ costs, it remains above the crucial 95-point watershed separating expansion (>95) and contraction (<95).

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Improved output is mirrored by a cautiously optimistic outlook for businesses, with BDO’s Optimism Index experiencing an uptick. The index rose slightly to 99.88, with both services and manufacturing buoyed by easing inflationary pressures and the prospect of an interest rate cut by Autumn.

This comes as BDO’s Inflation Index dropped below the 95-point to 94.94, entering contractionary territory for the first time since February 2021, when the third national lockdown dampened demand. Driven by a tightening in the Consumer Inflation Subindex, the drop reflects the lower energy price cap which came into effect in April. 

However, the impact of the cost of living crisis and inflationary pressures remains elevated. These are expected to continue weighing on business confidence and prevent it rebounding significantly until an interest rate cut comes into effect. 

Indicators such as core inflation and services inflation, a measure of price pressures facing consumers, remain historically high at 4.2% and 6.0% respectively. Fuel prices also rose due to the escalation of conflict in the Middle East, holding back further improvements in the Inflation Index. 

Employment Index falls for unprecedented 10th month but could bounce back soon 

Amid continuing uncertainty, BDO’s Employment Index recorded its tenth consecutive month of decline. Falling to 97.21, this is the index’s weakest reading since February 2013, when the worst effects of the Global Financial Crisis on unemployment were recorded. In its history, the Employment Index has never before fallen continuously for this many months. 

However, a potential interest rate cut later in 2024 is expected to cause the decline in hiring intentions to peak. The Employment Index is expected to fall marginally in the near term before starting to recover towards the end of Q3 2024. 

Commenting on this, BDO partner, Kaley Crossthwaite, said: “Cautious optimism is the order of the day for UK businesses hoping for an interest rate cut this summer.

“It’s heartening to see a turning point begin to materialise for the economy, with the services sector driving the bounce back so far from last year’s technical recession. But, businesses across the board need more certainty from the government, only once they have this will we start to see the more stable optimism, investment and hiring intentions needed for a robust recovery.”