UK economy shows promising signs of growth with output at two-year high
UK economy shows promising signs of growth with output at two-year high
- Rise in BDO’s Output and Optimism Indices to above 100 points shows resilient UK economy
- Sharp boost in manufacturing and promising summer tourism season marks positive start to second half of the year
- Employment Index continues year-long downward trend amid rising unemployment and falling vacancies before bounce-back expected later this year
The UK economy showed signs of growth in July following a boost in manufacturing production and the start of the summer tourism season, which likely contributed to an increase in headcount across the services sector. This surge fuelled a sharp increase in output, according to the latest Business Trends report from business advisory and accountancy firm, BDO.
Despite prevailing challenges including elevated input prices and persistent tightness in financial conditions, the BDO Output Index rose 2.67 points to 100.77 last month, driven by both manufacturing and services – two of the UK’s major sectors. This marks its highest reading since July 2022, when the UK was still enjoying a post-pandemic recovery.
This is the first time in two years that the Output Index has surpassed the 100-point threshold, indicating growth above historic trends.
The Optimism Index rose above 100 for the third consecutive month to levels last seen in mid-2022, rising slightly to 102.22 from 102.09 in June. This sustained growth in confidence amongst businesses reflects easing inflationary pressures and expectations of further interest rate cuts.
Manufacturing and services lead growth
The Manufacturing Output Index bounced back from a sub-95 reading in June, indicating contraction, to 100.03 last month. Manufacturing Optimism also hit 104.84 in July, the highest positive reading since the same month in 2022, when double-digit annual inflation and the pressure on margins prompted by war in Eastern Europe were beginning to weigh on the sharp rise in optimism arising from the post-pandemic recovery.
Production growth in the sector has now accelerated to an over two-year high. However, elevated input prices and persistent tightness in financial conditions arising from high interest rates continue to weigh on manufacturers.
The Services Output Index rose to 100.87, surpassing the 100-mark for the first time since August 2022, driven by a surge in new contracts and increased staffing to meet demand, particularly at the start of the summer tourism period. The Services Optimism Index also saw a slight increase to 101.88, indicating steady confidence in the sector.
Anticipated interest rate cuts are likely to spur further boosts in optimism in the coming months. Economic Consultancy Cebr expects another rate cut by the end of 2024, bringing the Bank of England Interest Rate to 4.75%, and that the UK will see slight economic growth of 0.6% quarter-on-quarter in Q3.
Employment Index likely near trough as policy loosening begins
Despite positive trends in Output and Optimism, the Employment Index continued its year-long downward trend, falling for the 13th consecutive month to 96.33 in July - its lowest point since February 2013, when the UK was still recovering from the Global Financial Crisis.
Job vacancies decreased by 30,000 in Q2 compared to the previous quarter as unemployment continued to increase, highlighting an ongoing loosening of the labour market. Cebr predicts the unemployment rate will peak in Q3 at 4.6% before declining at the start of 2025. This means further drops in the Employment Index are likely to be near-term ahead of a pick-up towards the end of the year, stimulated by interest rate cuts.
Inflation remains in growth territory for the third consecutive month
The BDO Inflation Index recorded its third consecutive month of expansion, reaching 97.76 in July. This was driven by the Consumer Inflation Index, which rose to 99.91 but remains below the year-to-date average of 100.69.
The rise in consumer inflation reflects fading base effects from the sharp annual drop in energy prices seen in Q2 2024. As deflationary pressures from April's energy price cut diminish, the Inflation Index is expected to remain around similar levels in the coming months.
Kaley Crossthwaite, Partner at BDO said: “It is encouraging to see both the Output and Optimism Indices rise this month; however, businesses aren’t out of the woods yet. Sustaining this positive momentum requires further support from the new Government, especially around skills, to give businesses access to the talent they need for driving growth long-term.
“Reforming the Apprenticeship Levy to introduce a more flexible approach will be crucial for the second half of the year, alongside a long-term plan to join young people up with local jobs by working with businesses, local authorities and the education system to connect them with training and apprenticeship opportunities.”
ENDS
Overview of the BDO indices
An overview of all four indices is provided in the table below, detailing figures for the last three months and the same month of the previous year, to allow for comparison. 100 = average value. Above 95 = positive.
BDO’s Business Trends is a ‘poll of polls’ and comprises multiple surveys covering 4,000 respondents. Further information on outputs is available on request, but please note the Labour Force Survey is not one of them.
| July 2024 (Figures for this report) |
June 2024 | May 2024 | April 2024 | |
| BDO Optimisim Index | 102.22 | 102.09 | 102.30 | 99.88 |
| BDO Output Index | 100.77 | 98.10 | 98.17 | 97.23 |
| BDO Inflation Index | 97.76 | 97.72 | 97.30 | 94.94 |
| BDO Employment Index | 96.33 | 96.77 | 96.99 | 97.21 |
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