Rate cut expectations boost UK business confidence

UK businesses were experiencing a sustained period of growth, driven by robust performance in the services sector, despite ongoing challenges in the labour market, according to a fresh report from BDO on Monday.

The advisory and accountancy firm’s Business Trends report highlighted a fourth consecutive month of business confidence remaining above historic growth levels, boosted by expectations of further interest rate cuts.

It said the services sector saw a notable increase in output, reaching a two-year high of 99.03, largely fuelled by a surge in new orders and a late summer tourism boom.

The growth spurred consumer and business spending, with businesses ramping up staffing to meet heightened seasonal demand.

Despite that, the overall optimism index for August dipped slightly to 100.33 but remained in positive territory, supported by a recent interest rate reduction to 5%, with further cuts anticipated.

Inflationary pressures also showed signs of easing, as BDO’s Inflation Index dropped for the first time in four months to 96.79.

While inflation remained above the Bank of England’s 2% target, both input and consumer price increases had slowed, signalling a potential reduction in cost pressures for businesses.

However, the report also highlighted persistent issues in the UK labour market.

BDO’s Employment Index fell for the 14th consecutive month to 95.89, its lowest level since January 2013.

That reflected increasing concerns about job vacancies and rising unemployment claims, with the unemployment rate now expected to peak in early 2025, according to economic consultancy Cebr.

“Despite ongoing inflationary pressures, it is good to see that businesses remain largely optimistic, with the services sector in particular continuing to be the cornerstone of economic growth,” said BDO partner Kaley Crossthwaite.

“The coming months will be crucial in determining whether the UK can maintain its recovery momentum and fight back against these headwinds.

“No doubt all eyes will be on the Autumn budget and the government’s plans for helping businesses tackle persistent unemployment levels and the skills gap.”

Reporting by Josh White for Sharecast.com.