Slowing services sector impacts business output

The slowing growth of the UK’s services sector, which has reached its lowest level in six years, is adversely impacting British business output, new figures show.

According to the latest Business Trends Report by accountants and business advisors BDO, the Output Index, which measures UK business output, fell from 99.97 in April to 98.58 in May. This decline was driven by the sluggish growth of the services sector, which makes up the majority of the UK’s economic output. BDO’s Services Sector Output Index dropped 1.36 points from the previous month to 97.90, its lowest reading since October 2012.

Reduced performance levels are also influencing firms’ outlook for the future. BDO’s Optimism Index, which shows how firms expect output to develop in the coming six months, declined 0.75 points to stand at 101.74 in May – its lowest level since March 2017. This was spurred by dwindling confidence in the services sector, which also recorded its lowest Optimism Index value in 14 months.

The latest results follow a poor first quarter in which the UK economy grew just 0.1% while business investment contracted. Consumer spending also slowed, held back by high household debt, stagnating wages and adverse weather. This month’s report indicates that the UK economy’s slow rate of growth is set to continue.

Compounding these factors, inflation is on the rise. BDO’s Inflation Index, which is a composite of consumer price and business input price inflation, rose to 98.70 in May from 97.51 the previous month. A key contributor to this rise has been the recent surge in oil prices as a result of production deals agreed by exporting petroleum countries to constrain oil supply.

Peter Hemington, partner at BDO, said: “After a poor first quarter, the UK economy is struggling to pick up the pace of growth in Q2. Business output is slowing and consumers are continuing to tighten their purse strings as they feel the pressure of rising prices and stuttering wage growth.

“The government needs to act fast to inject the nation with a confidence boost to encourage spending and investment. As we approach the two-year anniversary of the UK’s decision to leave the European Union, we need greater clarity on our exit plan so that businesses and consumers can feel rest-assured about making important investment and spending decisions for the future.”