Rising costs and consumer woes blight business outlook

Businesses remain pessimistic about the outlook for the economy after a sharp decline in output last month prompted many to scrap any hiring plans they had.

For the fourth month in a row, BDO’s optimism index was stuck in negative territory with a reading of 91.88 in January, slightly worse than the 91.89 recorded in December. Anything below 95 is considered negative.

Reflecting the jump in borrowing costs, the probability of a recession, tumbling consumer confidence and rampant inflation in the past year, optimism among British businesses has declined rapidly. In January 2022, BDO’s optimism reading was close to 105.

Although the economy narrowly avoided entering a technical recession at the end of last year, Jeremy Hunt, the chancellor, has warned that Britain is “not out of the woods yet”.

Companies in the services sector, including retailers, restaurants and accountants, were especially downbeat in January, although after nine months of declines optimism among manufacturers improved amid signs that cost inflation is starting to ease.

Inflation retreated again in January, largely because of falling energy prices, and now stands at its lowest point since last spring, although “inflationary pressures remain historically elevated”.

BDO’s survey chimes with official data. Inflation looks to have peaked in October at 11.1 per cent and had fallen to 10.5 per cent by the end of December. The Bank of England expects inflation to be as low as 4 per cent by the end of the year after a fall in natural gas prices.

BDO, an accounting firm, noted a “sharp decline” in the number of goods and services that British companies sold in January, with its output reading sliding almost 3.5 points to 89.15. It was the second month in a row that the index was below the 95 threshold for growth. It blamed the cost of living for weakening consumer spending.

Business owners have responded by scaling back their expansion plans, with BDO’s employment index, which measures hiring intentions, dropping to its lowest level since the end of 2021.

It was the third time in six months that BDO had seen all four of its measures — optimism, output, inflation and employment — fall at the same time.

“A net decline across the optimism, output and employment indices, coupled with historically high levels of inflation, suggests the outlook still remains bleak for businesses,” Ed Dwan, a partner at BDO, said.

Wishlist for the budget
There are four “non-negotiables” that the chancellor must address in next month’s budget, according to the British Chambers of Commerce. The business lobby group has called on Jeremy Hunt to unlock talent by making childcare more affordable and it also wants to see the business rates system reformed further. It is pushing for a new framework for Solvency II rules on regulatory requirements to encourage more investment into “green innovation”, as well as extra funding to help companies to improve their energy efficiency.

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Rising costs and consumer woes blight business outlook