BDO research has found that the UK economy showed signs of growth in July after manufacturing output picked up and the summer tourism season began, likely contributing to a rise in employment across the services sector.
The analysis showed that despite prevailing challenges, including elevated input prices and persistently tight 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 most important sectors. This is the highest reading since July 2022, when the UK was still in a post-pandemic recovery. This is the first time in two years that the Output Index has crossed the 100-point threshold, indicating growth above historical trends.
The optimism index rose above 100 for the third consecutive month, reaching a level last seen in mid-2022, rising slightly to 102.22 from 102.09 in June. This sustained increase in business confidence reflects easing inflationary pressures and expectations of further interest rate cuts.
The manufacturing output index recovered from a reading below 95 in June, indicating contraction, to 100.03 last month. Manufacturing optimism also reached 104.84 in July, the highest positive reading since the same month in 2022, when double-digit annual inflation and margin pressures triggered by the war in Eastern Europe began to weigh on the sharp rise in optimism due to the post-pandemic recovery.
Production growth in the industry has now accelerated to a level not seen for more than two years. However, high input prices and persistently tight financing conditions due to high interest rates continue to weigh on manufacturers.
The services production index rose to 100.87, crossing the 100 mark for the first time since August 2022. This was due to a rise in new contracts and an increase in staff to meet demand, especially at the start of the summer tourism season. The services optimism index also recorded a slight increase to 101.88, indicating stable confidence in the sector.
The expected interest rate cuts are likely to provide further optimism in the coming months. Economic consultancy Cebr expects another rate cut by the end of 2024, which would bring the Bank of England’s base rate down to 4.75%. In addition, the UK will record slight economic growth of 0.6% quarter-on-quarter in the third quarter.
Despite positive manufacturing trends and optimism, the employment index continued its year-long downward trend, falling for the 13th consecutive month to 96.33 in July – its lowest level since February 2013, when the UK was still recovering from the global financial crisis.
Job vacancies fell by 30,000 in the second quarter compared to the previous quarter as unemployment continued to rise, highlighting a continued loosening of the labor market. Cebr forecasts the unemployment rate to peak at 4.6% in the third quarter before declining in early 2025. This means the employment index is likely to continue to decline in the near term before picking up again towards the end of the year due to interest rate cuts.
The BDO inflation index recorded its third consecutive month of increase in July, reaching 97.76, driven by the consumer inflation index, which rose to 99.91, but is still below its annual average of 100.69.
The increase in consumer inflation reflects fading base effects from the sharp annual decline in energy prices in the second quarter of 2024. As deflationary pressures from the energy price cut in April ease, the inflation index is expected to remain at a similar level in the coming months.
Kaley Crossthwaite, partner at BDO, said: “It is encouraging to see both the Output and Optimism Indexes rise this month. However, businesses are not out of the woods yet. To maintain this positive momentum, further support from the new administration is needed, particularly in the skills area to give businesses access to the talent they need for long-term growth.
“Reforming the apprenticeship levy to introduce a more flexible approach will be key for the second half of the year, alongside a long-term plan to connect young people with local jobs by working with businesses, local authorities and the education system to connect them with training and apprenticeship opportunities.”
