British businesses are delaying recruitment and investment as weak consumer demand, rising operating costs and uncertainty surrounding the Iran conflict place renewed pressure on the economy.

The latest Business Trends report from accountancy and advisory firm BDO found that its measure of UK business output fell sharply during June, reversing the temporary improvement recorded earlier in the year.

BDO’s Output Index declined from 94.80 in May to 91.53 in June, its lowest reading since February 2021, when the UK remained subject to Covid-related restrictions. A reading below 95 indicates a contraction or negative rate of growth.

The fall does not mean that official UK gross domestic product has returned to its pandemic-era level. The BDO index is a forward-looking indicator compiled from several business surveys rather than a direct measure of national economic output.

Nevertheless, the scale of the decline suggests that businesses experienced a significant loss of momentum during June, with weakness spreading across both services and manufacturing.

Improvement in business activity proves temporary

Business activity had strengthened during the spring as some companies brought forward orders, accumulated stocks and prepared for possible disruption to international trade and energy supplies.

BDO’s Output Index reached 99.64 in April, its highest level in 16 months. By June, however, that improvement had largely disappeared.

The Services Output Index fell to 91.04 as subdued consumer confidence and delayed household spending affected demand. Services account for the majority of UK economic activity, meaning weakness in the sector can have a substantial effect on the wider economy.

Manufacturing also slowed. BDO’s Manufacturing Output Index declined from 99.31 in May to 95.39 in June, suggesting that the benefit from precautionary stockpiling and orders placed earlier in the year was beginning to fade.

Manufacturers have faced increased costs for energy, fuel, transport and raw materials, while uncertainty over supply chains has made it more difficult to forecast production requirements and delivery schedules.

The figures indicate that the economic pressures initially concentrated among energy-intensive and internationally exposed industries are becoming more widespread.

Employers remain reluctant to recruit

The deterioration in output has been accompanied by continued weakness in business recruitment.

BDO’s Employment Index, which combines hiring intentions, headcount expectations and labour demand, remained at 93.08 in June. This was only slightly above the 15-year low recorded during the previous month.

Businesses appear to be attempting to control costs and preserve flexibility by leaving vacancies unfilled, postponing new appointments and limiting permanent recruitment.

Scott Knight, head of growth at BDO, said: “Business confidence has remained low for 20 consecutive months as businesses are trapped in survival mode.”

Describing companies as being in survival mode does not necessarily mean that large numbers are close to failure. For many businesses, it reflects a defensive approach in which cash preservation, cost control and short-term resilience take priority over expansion.

Recruiting a permanent employee creates a continuing financial commitment involving salary, employer National Insurance contributions, pensions, training and other employment costs. Companies uncertain about future orders may therefore delay recruitment even when existing staff are under pressure.

Temporary recruitment provides a more balanced picture

The labour market is weak, but the evidence does not suggest that all recruitment has stopped.

The latest KPMG and Recruitment and Employment Confederation Report on Jobs found that permanent staff appointments continued to decline during June. However, the fall was the smallest for three months.

At the same time, temporary staff billings increased at their fastest rate since April 2023. Recruiters reported that businesses were favouring temporary workers and short-term projects because of economic uncertainty and concerns about costs.

This suggests that some employers still require additional capacity but are unwilling to make long-term commitments.

Temporary recruitment can allow businesses to respond to short-term demand, complete specific projects or cover employee absences without permanently expanding their payroll.

However, sustained reliance on temporary appointments may also indicate that companies lack confidence in the durability of future demand. It can reduce job security for workers and make it more difficult for businesses to retain skills and build experienced teams.

The KPMG and REC survey also found that overall demand for staff weakened at a faster rate, largely because of a sharper reduction in permanent vacancies. Redundancies continued to increase the availability of candidates, although employers were still prepared to offer higher starting pay for people with scarce or specialist skills.

Official figures confirm a weaker employment market

The latest official labour market figures support the broader picture of subdued hiring.

The Office for National Statistics estimated that the number of UK vacancies fell by 19,000 to 707,000 during the three months from March to May. This was the lowest level since the period from February to April 2021.

The number of payrolled employees fell by 138,000 between April 2025 and April 2026. An early estimate for May indicated that payroll employment was broadly unchanged during the month but remained 119,000 lower than a year earlier. The May estimate is provisional and may be revised.

The unemployment rate was estimated at 4.9% during the three months to April, while the number of people claiming unemployment-related benefits increased during May.

These figures indicate a labour market characterised more by reduced recruitment and fewer opportunities than by a sudden wave of large-scale redundancies.

Companies may retain their existing employees because replacing experienced workers could prove difficult and expensive when conditions improve. However, they remain reluctant to expand their workforce while the outlook is uncertain.

This can create a particularly challenging environment for young people, recent graduates and workers seeking to change jobs because fewer new positions become available.

Iran conflict adds to existing cost pressures

The Iran conflict has intensified pressures that were already affecting businesses, including weak demand, elevated borrowing costs and subdued confidence.

Disruption and insecurity around the Strait of Hormuz have increased concerns about the supply and price of oil, gas and raw materials. Even businesses that do not purchase energy directly on international markets can be affected through higher transport, distribution and supplier costs.

An ONS survey conducted during the second half of June found that 31% of businesses with at least 10 employees were concerned about international conflict affecting their supply chains during the following year.

Almost two-thirds of businesses expressed concern about energy prices, while 68% were worried about fuel costs. Concern about fuel prices increased to 86% among transport and storage businesses, while 88% of accommodation and food service companies reported concern about energy prices.

These pressures can spread through the economy as suppliers increase their prices to recover additional costs.

Businesses then face a choice between passing those increases on to customers, accepting lower profit margins or finding savings elsewhere. Where consumer demand is already weak, raising prices may be difficult.

Recruitment, marketing, investment and discretionary spending are therefore often among the first areas to be reduced.

Inflationary pressures return

BDO’s Inflation Index increased to 102.70 in June, its highest level for more than three years. The index reflects the cost pressures being reported by businesses rather than the official consumer inflation rate.

The increase suggests that companies expect input prices to remain elevated even as economic activity slows.

This combination is particularly difficult for businesses and policymakers. Weak growth would ordinarily support lower interest rates and measures to stimulate demand. Rising costs, however, increase the risk that inflation will remain above target.

Businesses may also experience inflation differently from households. Consumer price measures cover a basket of goods and services purchased by households, while companies may be particularly exposed to electricity, commercial rents, freight, insurance, imported components and finance costs.

A company can therefore face a substantial increase in operating expenses even where the headline consumer inflation rate appears comparatively moderate.

Bank of England faces competing risks

The Bank of England held Bank Rate at 3.75% in June. Seven members of the Monetary Policy Committee voted to leave rates unchanged, while two supported an increase to 4%.

The division reflects the competing pressures facing the Bank.

Weak employment, falling vacancies and subdued business activity provide arguments against increasing rates. Higher borrowing costs could discourage investment, weaken the property market and place additional pressure on households and businesses refinancing debt.

However, higher energy and input costs could feed into consumer prices and wages. The Bank may be reluctant to reduce rates while inflation remains above its 2% target and the risk of further energy disruption continues.

The next Monetary Policy Committee decision is scheduled for 30 July.

For businesses, uncertainty over rates makes financial planning more difficult. Companies considering new loans, property purchases or capital expenditure must assess not only current borrowing costs but also the possibility that rates could remain elevated or increase.

Higher government bond yields can also influence the cost of commercial borrowing because lenders and investors use government debt as a reference point when pricing other forms of finance.

Business confidence remains below the growth threshold

BDO’s Optimism Index remained below 95 for the 20th consecutive month during June. This indicates that weak confidence predates the latest escalation in the Middle East and cannot be attributed entirely to the Iran conflict.

Businesses have also been managing changes in employment costs, taxation, regulation and interest rates, alongside slow domestic growth and uncertain consumer spending.

The conflict has therefore acted as an additional shock rather than the sole cause of the downturn.

Confidence matters because expectations influence present-day decisions. A company that expects stronger demand may recruit workers, expand premises or purchase machinery. A company expecting difficult conditions is more likely to preserve cash and postpone investment.

When large numbers of businesses behave cautiously at the same time, their decisions can contribute to weaker economic growth. Reduced investment lowers demand for suppliers, while hiring freezes reduce household income growth and consumer confidence.

A loss of confidence can therefore become partly self-reinforcing.

Official economic figures remain more resilient

The weak business surveys should be considered alongside official economic figures, which present a less severe picture.

UK GDP grew by 0.6% during the first quarter of 2026, supported by increases in services, construction and production. However, monthly GDP subsequently fell by 0.1% in April, indicating that momentum weakened as the second quarter began.

Business surveys tend to become available before comprehensive official data and can provide an early indication of changing conditions. They are nevertheless based on sentiment, reported activity and weighted responses rather than a full measurement of the economy.

The BDO figures should therefore be treated as a warning that conditions deteriorated during June, rather than proof that the whole economy contracted by a particular amount.

The International Monetary Fund continues to expect the UK economy to grow by 1% during 2026 before expanding by 1.3% in 2027 as the effects of the energy shock gradually fade.

This forecast suggests that the UK may avoid a full-year recession, although growth of around 1% would remain modest and could feel like stagnation for many businesses and households.

What the hiring freeze means for businesses

The immediate priority for many businesses will be protecting cash flow and ensuring that staffing decisions are consistent with realistic demand forecasts.

Freezing recruitment can provide short-term savings, but it also carries risks. Existing employees may face heavier workloads, customer service can deteriorate and important projects may be delayed.

Businesses should distinguish between roles that can safely remain vacant and positions that are essential to generating revenue, maintaining compliance or delivering operational improvements.

Companies may also consider temporary workers, contractors, overtime or internal redeployment. Each option has different costs and risks and should not automatically be regarded as cheaper than permanent recruitment.

Temporary labour can be valuable where demand is genuinely uncertain, but frequently replacing workers can increase training costs and reduce continuity.

Businesses should also avoid imposing a universal recruitment freeze without considering individual departments. Continuing to invest in sales, technology, maintenance or specialist expertise may strengthen a company’s position when competitors are reducing activity.

Employees and jobseekers face fewer opportunities

For workers, the slowdown is likely to mean longer recruitment processes, greater competition for vacancies and fewer opportunities to negotiate significant salary increases.

Employers may take more time to approve positions and could seek candidates who meet a larger proportion of the role’s requirements before making an appointment.

The growth in temporary employment may provide opportunities for people seeking work, but it does not offer the same stability as permanent employment.

Workers with specialist technical, financial, digital and managerial skills may remain in demand even during a broader slowdown. KPMG and REC found that employers were increasing starting salaries in some areas to secure candidates with skills that remained difficult to find.

The labour market is therefore likely to become more divided. General recruitment may remain subdued while competition continues for employees capable of delivering productivity improvements, controlling costs or supporting technological change.

A period of caution rather than complete economic paralysis

The latest BDO report presents a concerning picture of slowing activity, weak confidence and limited recruitment.

Its Output Index has fallen to its lowest level in more than five years, while the Employment Index remains close to a 15-year low. Rising input costs and uncertainty surrounding energy supplies have added to pressures already affecting household spending and business investment.

However, the evidence does not show that every part of the economy has stopped growing.

Temporary recruitment increased during June, some employers continue to compete for specialist skills and the IMF still expects positive UK growth across 2026 as a whole.

The more accurate description is an economy in which businesses are becoming increasingly defensive. Many companies are trading, employing staff and serving customers, but they are reluctant to make commitments that depend on a confident view of future demand.

Whether this caution develops into a more serious downturn will depend on energy prices, the stability of international supply routes, inflation, interest rates and the ability of consumer spending to recover.

For the moment, hiring freezes appear to be one of the principal ways in which British businesses are attempting to protect themselves from an outlook that remains unusually difficult to predict.

Photo by Edmond Dantès: https://www.pexels.com/photo/woman-in-a-job-interview-4344878/