UK business prospects improve in the short-term

Output expectations reach a 12-month high, but eurozone crisis casts gloom over longer-term growth

The UK’s short-term business prospects have improved, with the consensus on current trading reaching a 12-month high.  However, the eurozone crisis has cast a dark shadow over longer-term growth prospects by undermining UK business confidence, according to the latest Business Trends report by accountants and business advisers BDO LLP.

BDO’s Output Index, which reflects the current experience of UK business people and therefore predicts GDP one quarter ahead, climbed to 96.7 in May from 95.8 in April. This is the third consecutive month that the index has climbed above the 95.0 mark that indicates growth, and stands at the highest level seen for a year. This suggests that the UK will experience growth from the middle of 2012.

Conversely, BDO’s Optimism Index has dropped for the third consecutive month, from a peak of 98.0 in February to 95.5 in May.  The index measures business performance two quarters ahead and suggests that UK businesses expect growth to tail off later in 2012.

Peter Hemington, Partner, BDO LLP commented: “Given that half the UK’s export goods go to the eurozone, it’s hardly surprising that the ongoing turbulence there is denting longer-term growth prospects here. The biggest issue for UK businesses at the moment is that the strength of the pound against the euro has made UK exports much more expensive, significantly denting export and growth prospects."

Against the backdrop of longer term uncertainty, this month BDO’s Employment Index has also declined, to 94.9 from 95.5 previously. Its return to below the 95 level points to continued weakness in the labour market, indicating that employment may fall in 2012.

Peter Hemington continued: “While the UK economy is currently doing 'OK, considering', it's clear that UK business people are worried by the eurozone crisis and are scaling back plans for hiring and investing.  This massively threatens the already fragile growth prospects for the economy.  

"The Government's plans to shrink current spending by the State remain a necessity, but a fantastic opportunity is being missed to build high quality infrastructure cheaply, taking advantage of the very low borrowing rates that the Government can source currently. More energy and imagination than we have seen so far is required to access this opportunity, with the key additional benefit this would bring in terms of stimulating growth and employment.  More of both are sorely needed at the moment."

For the full report, click here: BDO Business Trends Report June 2012

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For more information contact Charlie Eccleshare, Jon Date or Juliana Bruton at Blue Rubicon on behalf of BDO LLP on 0207 260 2700 or bdo@bluerubicon.com

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.

Notes to editors

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