UK business resilient as eurozone struggles to stave off credit crunch

Latest report reveals business confidence split between UK and euro area

Against a backdrop of rising inflation on both sides of the water, the latest BDO UK and Euro Area Business Trends Report reveals a division between the confidence of businesses in the UK and the euro area. Whilst both economies are set to face slowing economic growth, the latest report reveals that UK businesses are expecting more favourable conditions than euro area firms.

Gloomy outlook for euro area

The report, by accountants and business advisers BDO, reveals that short term UK business confidence remains stable, with the Output Index remaining steady at 99.8 in April. In contrast, the euro area Output Index fell from 97.9 in January to 97.7 in April. Whilst both indices are below the 100 mark, the lower and decreasing levels in the euro area signify a much gloomier outlook for businesses on the continent in the second quarter of 2008.

Above trend growth for UK business in medium term

The Optimism Index, which reflects business expectations two quarters ahead, further accentuates the confidence split. The UK Optimism Index showed a slight reduction from 101.0 in January to 100.9 in April. The index remains above the neutral 100 mark, indicating above trend growth in the third quarter of 2008. However, medium term business confidence in the euro area declined sharply, falling from 99.1 in January to 97.9 in April.

Peter Hemington, partner at BDO LLP, said: ‘Despite a multitude of pressures, including rising inflation, faltering consumer confidence and rocketing input prices, UK business is showing surprising resilience which will be welcome news for the Chancellor and the UK economy. The differing confidence levels on each side of the channel may well reflect the responses from the European Central Bank and the Bank of England. In its bid to tackle inflation, the ECB has had little room to manoeuvre and has not been able to assist the markets with rate cuts. However, the Bank of England has been able to take a more expansionist approach and in doing so has successfully bolstered UK business confidence for the short to medium term.’

_____________________________________________

Notes to editors:

  1. The BDO Business Trends Report Indices are calculated by taking a weighted average of the results of all the UK’s main business surveys carried out during the last month.
  2. The Euro area indices are calculated by taking a weighted average of the results of the Europe’s main business surveys. They incorporate the results of the German IFO surveys, French INSEE surveys, Italian ISAE surveys, plus the main business surveys from the Austrian WIFO, Belgium National Bank, Spanish MCYT, Greek Foundation of Economics and Industrial Research, Irish Economic and Social Research Institute, the STATEC survey from Luxembourg, the Confederation of Finnish Industry and Employers, the Dutch central Bureau of statistics and the Portuguese INE surveys as well as the Chartered Institute of Purchasing and Supply’s Surveys of Manufacturing and of Services for Europe.
  3. Methodological notes: The BDO Monthly Business Trends Indices are prepared on behalf of BDO by the centre for economics and business research (cebr).

Taken together the surveys cover over 11,000 different respondents from companies employing approximately five million employees. The respondents cover a range of different industries and a range of different business functions. Together they make up the most representative measure of business trends available.

The surveys are weighted together by a three-stage process. First, the results of each individual survey are correlated against the relevant economic cycles for manufacturing and services. This determines the extent of the correlations between each set of survey results and the relevant timing relationships. Then the surveys are weighted together based on their scaling, on the extent of these correlations and the timing of their relationships with the relevant reference cycles. Finally, the weighted total is scaled into an index with 100 as the mean, the average of the past two cyclical peaks as 110 and the average of the past two cyclical troughs as 90.

The results can not only be used as indicators of turning points in the economy but also, because of their method of construction, be seen as leading indicators of the rates of inflation and growth.