UK business confidence has reached its lowest point in nearly two years, according to the latest Business Trends Report by BDO. The BDO optimism index fell by 5.81 points to 93.49 in November, marking the steepest month-on-month decline since 2021. Firms are grappling with rising costs, reduced customer confidence, and falling orders, leading to a potential economic contraction.

The decline in confidence is likely to reflect businesses’ immediate reaction to announcements in the Autumn Budget, which included increased employer National Insurance Contributions and a higher National Living Wage. Optimism fell across services and manufacturing – two of the UK’s major sectors – but the significant drop in the Index was primarily driven by the Services Optimism Sub-Index, which declined by 6.1 points from 99.34 in October to 93.19 in November.

The BDO Output Index also recorded a sharp drop, falling 3.20 points to 94.66 in November, its weakest reading since October 2023.

The Index has now entered contractionary territory for the first time this year, signalling that output in the UK economy shrank in November, driven by strong declines in both services and manufacturing activity. The Services Output Index fell to 3.37 points to 95.03, reflecting reduced customer confidence, declining staff numbers and rising input costs. Manufacturing also declined with the Manufacturing Output Index dropping to 91.74 amid weakening domestic and overseas demand.

Employment also saw a marginal return to decline, with the Employment Index falling 0.44 points to 95.96 in November, after rising in October for the first time in 15 months. Ongoing challenges in the labour market persist, as both average wage growth and payroll data continue to slow. (Note: Payroll data refers to the number of employees listed on UK payroll, based on HMRC PAYE records, and does not include the self-employed.) Despite businesses pinning their hopes on the prospect of further interest rate cuts early next year, cost pressures – including higher National Insurance Contributions – may offset any positive effects, leaving a mixed future picture for businesses.

Kaley Crossthwaite, Partner at BDO, said “December marks the end of a tough couple of years for businesses and the drop in business confidence this month is not a surprise given the  significant challenges they continue to face.

“While it’s encouraging to see businesses planning ahead already and findings efficiencies to manage rising costs, meaningful growth in 2025 will only happen with targeted support from the government. Policies that address the continued effects of inflation and pricing challenges are vital. Resilience remains a defining feature of UK mid-market businesses, and with the right support, they are well positioned to weather these challenges, create jobs and drive growth.”

Source: Credit Connect