Business confidence declined across the board this month as the already bleak outlook for UK companies worsened, according to the latest Business Trends report by accountants and business advisors BDO LLP. UK businesses now expect to see little economic growth over the next six months.
As last month’s Business Trends report predicted, growth has been profoundly hampered by ongoing fragility in the manufacturing sector.
The manufacturing output index – a measure of orders on hand and a good guide to manufacturing growth one quarter ahead – has fallen to 93.9, below the 95 level which indicates contraction of the industry, and the lowest since October 2009 when the economy was tentatively emerging from recession. The manufacturing optimism index – which reflects how businesspeople expect trade to develop over the next six months - has now stayed below the 95 level for two months, suggesting that manufacturing will remain mired in recessionary conditions past the turn of the year.
However, one bright spot for manufacturing employers is that wages continue to remain firmly under control, with year-on-year pay growth between March and May 2011 at 1.0%, compared with 2.1% across all sectors.
The services sector, while not declining like the manufacturing sector, has been hovering around 95 for both optimism (95.5) and output (95.3) for over a year. This points to zero growth in the sector for the rest of 2011.
Peter Hemington, Partner, BDO LLP, commented: “As our data has suggested for some time, the UK’s economic recovery continues to falter. The rapid decline of the manufacturing sector, championed as the key to a rebalancing of the UK economy, is alarming. And the services sector is showing little sign of picking up the slack.”
The economy’s problems are compounded by inflation; this month the BDO inflation index reached a 35-month high. Moreover, these inflationary pressures show little sign of decreasing, as double-digit price increases for electricity and gas, due to take effect in September, are likely to aggravate the situation.
Peter Hemington continued, “The Government faced some very difficult choices when it came to office and its decision to give public borrowing first priority may well have preserved the UK from getting embroiled in its very own sovereign debt crisis. Unfortunately, a key side effect of this policy was that business confidence plummeted last year and has remained low ever since. Manufacturing was one of the few bright spots, but this is now in a contractionary phase.
“One can’t pretend that it’s easy to see what the government should do next, but we should not forget that continued low growth is as substantial a medium term threat to the UK’s credit worthiness as continued high borrowing is in the short term. The need to tackle inefficiency and overspending in the public sector remains clear. In addition, we believe that a greater focus on supply side measures to improve UK competitiveness is vital. This would include simplifying and making the tax system more attractive, continued reform of labour market regulation and looking hard at ways to improve the quality of the UK’s infrastructure.
"And in the past, we have been keen to see that QE remains on the MPC’s agenda – we see no reason to change this view.”
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To view a copy of the report, click here: Business Trends Report August 2011
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The BDO Monthly Business Trends Indices are prepared on behalf of BDO LLP by the centre for economics and business research ltd., a leading independent economics consultancy. cebr has particular strengths in all forms of macroeconomic and market forecasting for the UK and European economies and in the use of business survey techniques.
The indices are calculated by taking a weighted average of the results of the UK’s main business surveys. It incorporates the results of the quarterly CBI Industrial Trends Survey (and the CBI Monthly Trends Enquiry which is carried out in the intervening months); the Bank of England Agents’ summary of business conditions; and the Chartered Institute of Purchasing and Supply’s Surveys of Manufacturing and of Services.
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.