Business output growth slows as labour shortages and energy prices hit businesses

Business output growth across the UK has slowed for the sixth consecutive month – bringing it to the lowest overall level since March – as supply chain disruption and staff shortages continue to hit businesses, according to the latest Business Trends report from accountancy and business advisory firm BDO LLP.

The Output Index, which provides the most comprehensive snapshot of output in the manufacturing and services sectors by weighting macroeconomic data from the UK’s main business surveys, decreased from 105.23 points in September to 103.35 in October. Declines were seen across both manufacturing and services, which fell to their lowest respective levels since March.

Manufacturing output growth, which has been particularly badly impacted by supply chain disruption, fell by 2.09 points to hit 97.03 in October – edging closer to the 95-mark which separates growth and decline. Staff shortages have been the main driver behind the slowdown in output growth in the services sector, which dropped by 1.85 points to 104.15 in October.

The termination of the furlough scheme at the end of September also caused BDO’s Employment Index to fall for the first time since January, when a further winter lockdown had curtailed economic activity. The Employment Index fell by 1.13 points to 107.65 in October, however,

this dip is expected to be short-term as the economy continues to recover throughout 2022 and demand for workers grows.

Elsewhere in the report, BDO’s Inflation Index continued to rise in October – it now represents the highest value since April 2017. Higher consumer prices driven by an increase in the energy price cap drove the overall rise. The Consumer Inflation Index increased by 3.06 points to reach 105.76 in October, its highest value since November 2008. Spiraling inflation, standing firmly above the Bank of England’s target rate of 2%, led to significant pressure on the Bank to increase interest rates last week.

Commenting on the results, Richard Rose, partner and head of BDO LLP in the Midlands, said: “Businesses are facing an increasingly difficult winter. Between rising inflation and a lack of staff, 2022 could be a difficult year for companies who have been forced to prioritise short-term problems over long-term growth. At the same time, consumers are beginning to see the impact of these shortages with rising fuel and energy prices, which may in turn lead to cutbacks in discretionary spending.

“In the final months of the year, businesses and consumers alike will be hoping that the economy can find some Christmas spirit over November and December and help take us into the new year on a high.”

Industry reaction

According to BDO Consulting, the UK manufacturing industry is struggling particularly with keeping up with rising demand as the index dropped two points to 97, nearing the 95 mark, which indicates declining output amid the supply chain crisis.

Emma Sutton, chief customer officer, EMEA Business Transformation Oracle Consulting comments: ““BDO’s latest data finding the UK manufacturing industry dealing with continued supply problems is just the tip of the iceberg. This is not a siloed event, continued disruption to the supply chain is wreaking havoc to already struggling businesses. And its consumers that will pay the price.

“One thing is certain; we need smart solutions for an intelligent exit strategy from this supply chain crisis.

“To a large extent, disruption has been caused by a lack of visibility – not just visibility in terms of where their products or items are, but visibility into the partners and stakeholders upon whom many supply chains are so dependent in order to work efficiently.

“Businesses can no longer wait for the dust to settle. They must implement new technologies and have 360-degree visibility across the supply chain to deliver an efficient customer service. It’s no wonder that 70% of consumers would be more willing to buy from a brand they knew used artificial intelligence to manage their supply chain. After all, it’s innovation that drives efficiencies.”