Business optimism builds as inflation and supply chain woes ease - BDO

Inflation remains stubbornly high, but has eased to its lowest point for a year, boosting business confidence and hiring intentions, according to a new poll of polls by accountancy firm BDO.

BDO’s latest inflation index cooled by 2.19 points, dropping to 110.99 points. A score above 95 means that inflation is growing. It marks the lowest score since March 2022, but is still high by historical standards as cost-of-living pressures continue to hit households and businesses.

The drop was mainly driven by a fall in what BDO calls the input inflation sub-index which tracks the prices that businesses face when producing a product or a service. The firm said that pressures within companies’ supply chains had eased and wholesale energy prices have fallen, taking some of the pressure off businesses.

But it does not mean that businesses are out of the woods. At the start of this month, the support that they have been getting from the government to help with runaway energy bills was slashed. There were also a series of changes to the tax regime, some of which will put pressure on many companies.

Kaley Crossthwaite, a partner at BDO, said: “It’s encouraging to see business optimism leading to renewed hiring intentions once more as businesses see input price and supply chain pressures ease slightly. Improvements in the output and inflation indices will only lead to a better outlook, as they work to drive growth and leave signs of a downturn in the past. However, with the less generous Energy Bills Discount Scheme now in place and expectations of a recession remaining, the economy is likely to face further headwinds despite recent resilience. Businesses need as much certainty and support as possible to continue weathering the persistent challenges ahead.”

March saw the BDO output index reach a seven month-high at 99.48, its strongest reading since August 2022, when it stood at 100.25. This suggests the economy grew last month, driven by the services sector which exceeded the 100-point threshold for growth for the second consecutive month to now sit at 100.95. The manufacturing output sub-index also rose in March, climbing 2.73 points following the 0.59-point decline seen in February. While the sub-index still remains in contractionary territory, it is likely this will continue to improve as input price pressures and supply chain difficulties ease further, BDO noted.

The survey contained worse news for householders. The consumer inflation sub-index rose to a three-month high of 118.53, BDO said, a rise of 1.41 points. It happened as consumer price index inflation (CPI) picked up in February, especially in the food and hospitality sectors. The BDO indices look at several different surveys, including ones from the Confederation of British Industry (CBI), the Bank of England, IHS Markit and CIPS.

Recently it emerged that more UK business sectors had reported an increase in output than at any time in the past ten months during February as the economy’s “relative robustness” propped up demand. Of the 14 sectors monitored by the Bank of Scotland UK Sector Tracker, 11 saw output expand in February, compared with just six in January.