UK businesses close to calling the recovery

Pace of decline set to slow by 50 per cent – Output Index registers strongest gain for five years

UK businesses expect the pace of economic decline to slow markedly over the next quarter, with the economy shrinking at just half the pace of recent quarters, according to the latest Business Trends report by accountants and business advisers BDO LLP. 

The BDO Output Index has registered its strongest monthly gain since February 2004, rising to 92.0 in May from 90.0 in April.  This suggests that GDP growth will be minus 0.3 per cent over the next quarter.  The index, which measures short-run turnover expectations and order book strength, does not yet signal the end of the downturn.  However the numbers are creeping closer to the 95.0 mark which signals recovery.

Given how quickly the indices have rebounded, the numbers give further support to the Chancellor’s predictions of a recovery starting in Q4 2009.  Additionally, the Inflation Index continues its return towards more normal levels, as quantitative easing and the overall weak pound carry on the successful attack against deflationary expectations.     

Peter Hemington, Partner at BDO, says: “These figures are good news but we can’t call the end of the recession yet.  There are still two risks that could lead to a w-shaped recession.  First, official figures suggest that there has been little recovery in bank lending.  The banks still need time to sort themselves out and it seems that there is insufficient capital in the system.  Public policy may need to readdress this soon. 

Second, it is clear that the Chancellor is walking a tightrope on spending – too much and he will lose the confidence of the markets, too little and recovery could stall.  While he needs to articulate better how he will bring borrowing down in future, the grave downside risks that we still face argue in favour of continuing relatively loose fiscal policy through 2010.”

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For more information or for the full report, please contact Laura Gainsford at Blue Rubicon on 020 7260 2700, or Matthew Longbottom at BDO on 0207 893 3073.

Notes to editors:

Methodological notes:

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.

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.

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