British businesses pulled back on hiring and focused on preserving operations in June as rising costs, weak consumer spending and geopolitical tensions combined to slow economic activity, according to new research from consultancy BDO.
The firm’s economic output index fell to 91.53 in June from 94.80 in May, marking its weakest reading since February 2021, when the UK remained under Covid-19 lockdown restrictions. The figures point to growing pressure on businesses as higher operating costs and slowing demand weigh on economic performance.
BDO said companies are becoming increasingly cautious about recruitment, with hiring intentions close to their lowest level in almost 15 years. Businesses are also dealing with the sharpest increase in operating costs in more than three years.
Manufacturers and service providers were both affected during June as rising energy prices, more expensive raw materials and higher input costs continued to squeeze profit margins. The consultancy linked much of the cost pressure to disruption in global energy markets following the effective closure of the Strait of Hormuz after the initial US-Israeli strikes on Iran at the end of February.
The conflict has continued to unsettle international markets. During the past week, the United States and Iran exchanged further military strikes, while US President Donald Trump declared that the fragile ceasefire between the two countries had ended. The renewed tensions briefly pushed Brent crude above $80 a barrel before prices eased to around $75 by the end of the week.
Scott Knight, Head of Growth at BDO, said business confidence has remained weak for almost two years.
“Business confidence has remained low for 20 consecutive months as businesses are trapped in survival mode. Rebuilding confidence will need to be tackled immediately by the next prime minister if the UK is to return to growth,” Knight said.
Andy Burnham is due to become the UK’s next prime minister on July 20, succeeding Sir Keir Starmer. The latest economic data suggests reviving business confidence and economic growth will be among the new government’s immediate priorities.
Official figures from the Office for National Statistics, due later this week, are expected to show that the UK economy expanded by just 0.1% in May after shrinking by the same amount in April.
The uncertain economic outlook has also affected financial markets. The yield on the benchmark 10-year UK government bond climbed by around 0.10 percentage points over the past week to 4.87%, increasing borrowing costs for businesses seeking to refinance loans, overdrafts and commercial mortgages.
BDO believes business confidence is likely to remain under pressure while geopolitical tensions persist and energy markets remain volatile.
Economists remain divided over whether the Bank of England will raise its base interest rate from the current 3.75% later this year. Financial markets have become more supportive of another rate increase since oil prices surged following the Middle East conflict.
Recent labour market data has presented a mixed picture. The Office for National Statistics reported that job vacancies fell to a five-year low during the three months to May, while private sector pay growth excluding bonuses slowed to 2.9%, the weakest increase in more than five years.
Attention will now turn to the Bank of England’s Monetary Policy Committee meeting on July 30, where policymakers will decide whether economic conditions warrant any change to interest rates.
