Optimism dips amid gloomy outlook for service sector

There has been a call for the new UK government to reveal 'immediate pro-business measures' after new data showed growth in the services sector has slowed to worrying levels.

Slowing consumer spending is hitting the services sector. Picture: Liu Jin/AFP/Getty Images
Slowing consumer spending is hitting the services sector. Picture: Liu Jin/AFP/Getty Images

According to the latest Business Trends Report by accountant and business adviser BDO, its output index for services, which indicates how businesses expect their order books to develop over the next three months, fell to 95 in May from 95.3 in April, marking the lowest level since June 2013.

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Despite a more positive picture in manufacturing, the gloomy services sector dragged BDO’s combined output index to 95.4 from 95.6.

BDO said its findings “echo the latest GDP figures, which show the UK is now the slowest-growing of all the G7 economies, tied with Italy”, but businesses in Scotland and UK-wide remained optimistic.

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The firm, which has offices in Edinburgh and Glasgow, said services firms say growth in their order books has virtually stopped, meaning the output index for the sector is around the 95 level, indicating “recessionary conditions”.

It also said the slowdown has been evident since August 2015, but the downward trend has accelerated since the UK’s vote to leave the EU and consequent fall in the pound.

BDO stated that price hikes driven by rising inflation are putting pressure on household budgets and hampering consumer demand, and its inflation index now sits at 105, an increase of 0.3 from April.

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It marks the tenth month in a row that inflation has been above the long-term trend, with factors such as slowing consumer spending hitting industries like retail and hospitality. BDO also said UK manufacturing output is growing and expected to rise further, with its sub-index for the sector up 0.6 to 97.7.

The sector’s optimism index, which indicates how firms expect their order books to develop in the coming six months, reached a three-year high of 116.4.

The report found that Scottish and UK businesses still remained confident about the future, with BDO’s optimism index up 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,” the firm said.

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Martin Gill, head of BDO in Scotland, said many are attributing the slowdown in the services sector to the snap election. “But the downward trend is clearly much more deeply rooted than this,” he added. “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.”