Peter Hemington, corporate finance partner at BDO, talks about the firm’s latest review of business trends and how businesses are adapting to the recession.
Overall, our latest poll of polls presents mixed news on the UK economy. On the pessimistic side, the prospects for inflation and employment both receded to all time lows, bringing the reality of deflation and mass unemployment ever closer. There is some reason to be optimistic however, with business confidence over the near and medium term (as measured by the output and optimism indices respectively), both rising in February. Whilst the current crisis has already bought many false dawns, the result is encouraging, especially if the trend continues.
UK businesses are beginning to factor-in the tough economic conditions and are now taking swift decisive action to manage in the downturn. This includes employing tactics such as halting production and implementing new employment strategies to keep costs down. The report further illustrates this where it reveals that while there has been a reduction in full time employment figures, part time employment actually rose by 33,000 in October – December 2008.
It is this adaptation to the challenges of the recession that has contributed to the rise, for the first time in 13 months, in the report’s short and medium term confidence. While optimism remains low, and businesses expect the economy to continue to contract, the report’s Optimism Index, which measures business confidence two quarters ahead, rose to 90.5 in February from 89.9 in January. Similarly, the Output Index that measures order book strength and short run turnover expectations in the next quarter edged up to 88.3 in February from 88.1 in January 2009 - a 29 year low.
Despite this rise, we should not anticipate green shoots any time soon as it is far too early to tell whether or not this is the start of an upward trend. Although companies seem to be adapting their business models for an uncertain future, firms cutting back means that more than 320,000 more jobs could go between now and the next quarter. Indeed, the report’s Employment Index dropped from 94.2 in January to 91.7 in February, painting a very bleak picture of the labour market.