UK services sector at a standstill

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Richard Rose, Partner and head of BDO in Birmingham & The Midlands. Picture by www.edwardmoss.co.uk

Growth in the UK’s services sector, which makes up most of the UK economy, has slowed to a standstill and is on the brink of shrinking, according to the latest Business Trends Report by accountants and business advisers BDO LLP.

The new report shows that BDO’s Output Index for the services sector – which indicates how businesses expect their order books to develop over the next three months – has fallen to 95.0 in May from 95.3 in April, the lowest level since June 2013. Businesses within the UK services sector now say that growth in their order books has all but stopped, meaning that the BDO Index is hovering around the 95 level which indicates recessionary conditions.

This slowdown has been apparent since August 2015, but the downward trend has been more pronounced since the EU referendum and the resulting currency devaluation which has eroded consumer spending power.

Increasing prices driven by rising inflation are stretching household budgets and damaging consumer demand. BDO’s Inflation Index now sits at 105.0, an increase of 0.3 from April. It is now the tenth month running that inflation has been above the long-term trend. Slowing consumer spending and higher competition for customers is having a significant impact on consumer-facing service industries such as retail and hospitality.

In contrast, UK manufacturing output is increasing and is expected to rise further. BDO’s Output sub-index for the sector increased 0.6 from April to May and now sits at 97.7, closing in on the long-term growth trend at 100.0. The sector’s Optimism Index – which indicates how firms expect their order books to develop in the coming six months – is at a three-year high of 116.4. It suggests that the recovery of the sector is set to continue as demand grows for the UK’s more price-competitive products, supported by the general pickup of the global economy.

Despite the buoyant manufacturing sector, the slowing services sector – which makes up most the UK economy – is responsible for the UK’s bleak economic outlook. BDO’s Output Index now sits at 95.4, falling from 95.6 last month. The findings echo the latest GDP figures which show that the UK is now the slowest growing of all the G7 economies, tied with Italy.

Undeterred by the current performance of their order books, UK businesses remain optimistic about the future. BDO’s Optimism Index has risen again to 102.8 from 102.5 in April. It further demonstrates the growing disconnect BDO previously mentioned between what businesses are experiencing now and forecast for the future.

Commenting on the findings, Richard Rose, Midlands Tax Partner, BDO LLP, said:

“Business activity in the UK’s services sector is definitely slowing down, with many blaming this on the snap election. But the downward trend is clearly much more deeply rooted than this. Surprisingly, UK businesses remain optimistic about the future, but an immediate recovery seems unlikely.

“The new government should be quick to announce immediate pro-business measures to ensure we aren’t left disappointed with an increasingly stagnant economy as we go through the rest of the year.”