UK business activity fell to its lowest level in more than five years in March, as rising energy costs and geopolitical uncertainty weighed on output and confidence, according to BDO LLP.

BDO’s Business Output Index declined to 94.93, down from 95.78 in February, slipping below the 95 threshold that signals contraction for the first time since February 2021. The downturn was felt across both manufacturing and services, pointing to a broad-based slowdown.

Manufacturers faced renewed pressure from higher fuel and energy costs, squeezing margins as commodity prices rose. This was reflected in BDO’s Inflation Index, which increased to 99.30 in March. In the services sector, activity was dampened by weaker demand and greater caution around discretionary spending, as both businesses and consumers held back.

Business confidence also deteriorated sharply. The Optimism Index fell to 91.83 from 93.45, reversing gains seen in February. Manufacturers reported their lowest confidence levels since April 2025, when uncertainty around US tariffs disrupted trade expectations.

The weakening outlook extended to the labour market. BDO’s Employment Index fell to 93.28, its lowest level in 15 years, signalling subdued hiring intentions. Official data from the Office for National Statistics shows payrolled employment remains below year-earlier levels, while vacancies have shown little improvement.

Analysts expect the current pressures to persist. Elevated inflation is forecast to continue into the second half of 2026, while higher energy and input costs are likely to limit businesses’ ability to expand. As a result, labour demand is expected to remain weak, with unemployment projected to stay near peak levels until at least early 2027.

Scott Knight, head of growth at BDO, said the escalation of conflict in the Middle East had compounded existing challenges. “Soaring energy and commodity prices, alongside geopolitical volatility, are weighing heavily on businesses,” he said.

He added that while a temporary easing of tensions had provided some relief, a sustained recovery in confidence would depend on greater stability in global energy markets.