Output hits 16 month low but steadying business confidence signals the wane of economic woes

Economic growth is likely to continue to ease in Q1 and Q2 2011, according to the latest Business Trends report by accountants and business advisors BDO LLP. However, BDO’s survey also reveals emerging signs that businesses may be beginning to feel more optimistic about the UK’s economic outlook.

BDO’s Optimism Index, which shows how UK companies expect to trade in two quarters’ time, is still well below the crucial 95 mark - representing a contraction in the economy - indicating that growth in Q1 2011 could be negative. Furthermore, the outlook for Q2 is weak. Similarly, BDO’s Output Index, which predicts trading over the next three months, has slipped below the 95 mark for the first time since June 2009 to 93.8 in October from 95.9 in September, signalling a potential contraction in the economy as early as December 2010.

However, looking positively at the data, there is reason to hope that economic conditions will soon improve.  BDO’s Optimism Index was in freefall between April and August, but that has now stopped.  Indeed, September saw a slight improvement in the Index - albeit from a low base - increasing from 91.6 in September to 91.9 in October. This uptick in confidence should start to feed into more favourable economic conditions from the backend of Q2 2011 onwards. Better-than-expected GDP figures of 0.8% for Q2 2010 are likely to have created an element of positive sentiment among businesses. 

Peter Hemington, Partner, BDO LLP commented: “The slight increase in the Optimism Index is, we hope, a sign that the rot may have stopped and businesses are starting to regain confidence after a dire five months. We would, however, urge caution. Although GDP data was above expectation for Q2 and Q3 2010, this was buoyed by a short-term boost in the construction sector which is likely to weaken as the public sector spending cuts take their toll. 

“Although our research suggests that there could be a light at the end of the tunnel, prospects for growth are still gloomy in the immediate term. Mervyn King’s announcement last Wednesday left the door open for further QE, but did not commit to it. We urge the Monetary Policy Committee to consider an additional round of QE of £50 billion by Q1 2011 to ensure growth in the new year is not jeopardised.”

 - Ends –

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Methodological Notes

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. 

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.