UK services sector at a standstill - BDO

Growth in the services sector has slowed to a standstill and is on the brink of shrinking, according to accountants and business advisers BDO’s latest Business Trends Report.

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 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 is responsible for the 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, Scottish and 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.

Martin Gill, head of BDO LLP in Scotland, said: “Business activity in the 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, businesses in Scotland and the UK remain optimistic about the future, but an immediate recovery seems unlikely.

“The new UK 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.”

The BDO report comes as a snap poll of 700 UK-wide members of the Institute of Directors found a “dramatic drop” in confidence following the hung parliament.

The 700 members who responded to its survey said they want a rapid agreement with the European Union on transitional arrangements for Brexit, along with clarity on the status of EU workers in the UK.

Members also said they can see no clear way to resolve the political impasse left by last week’s hung parliament result quickly, the IoD said.

However, it found there was “no desire” for another election this year.

Going to the polls again before Christmas would have a negative impact on the UK economy, which was already facing global headwinds, the IoD added.