The latest Business Trends report from accountancy and business advisory firm BDO provides further evidence that inflation is set to rise in the run-up to Christmas as fears grow that the UK is heading towards a recession.

The figures indicate that inflationary pressures are to blame for the decline across three of BDO’s four indices, as optimism, output and employment all recorded their weakest readings for at least six months. BDO’s Inflation Index reached an all-time high in October forcing businesses to re-evaluate production in line with demand and supply-side headwinds and exercise caution in their outlook and hiring intentions.

October saw BDO’s output and optimism Indices plummet to 93.10 and 94.63, respectively, their lowest levels since the third national lockdown in February 2021. Both indices now sit in contractionary territory, below the 95-point mark, which is regarded as the watershed between growth and decline and an indicator of a recession.

The dip in productivity was driven by a fall across both the services and manufacturing indices for the second month in a row. Continued disruption to global logistics networks and increased input prices have pushed manufacturing activity into negative territory, while the cost-of-living crisis has impacted consumer demand, driving down services output, the survey said.

Confidence among businesses followed a similar downward trajectory as the weaker macroeconomic environment drove a seventh consecutive month of decline for BDO’s optimism Index. BDO’s inflation index rose by 1.67 points in October to a record high of 120.67 following an increase in the energy price cap which caused consumer price inflation to climb.

Driven by inflationary fears, the employment index mirrored waning confidence among businesses with a fall of 1.14 points to 113.05 last month. However, the index has remained resilient, and the unemployment rate stood at a historic low of 3.5 per cent on the most recent reading in the three months to August. Despite the index remaining firmly in positive territory, hiring intentions are set to decline in the longer-term as businesses continue to tackle mounting inflation and a recession, resulting in further falls in the index over the coming months.

Terry Jones, Partner and Head of BDO LLP in Yorkshire and the North East, said: “A contraction in both optimism and output is a concerning bellwether for firms, as inflation is expected to continue climbing in the run-up to Christmas. A weaker currency and drop in consumer spending power will have real and tangible consequences for firms relying on imports or customers in the retail and services sector, alongside the knock-on effects of managing political and economic uncertainty.

“We also know that rising energy costs are a top concern for nearly half of mid-sized businesses this winter as we’re only just beginning to see the impacts of the energy price cap rise. Firms will be looking to the Autumn Statement for the support they need as they navigate a tough period ahead.”

Confidence and output growth fall to lockdown levels as recession looms , says BDO survey