UK economy teetering on the brink

19 April 2013

Businesses’ output continues to decline but inflationary pressures are easing

The UK economy stands on the precipice of contraction, with businesses’ turnover expectations falling further in December. However, easing inflationary pressures may help prevent the UK from falling off the precipice - according to the latest Business Trends report by accountants and business advisors BDO LLP. 

The overall forecast for the UK economy remains bleak. BDO’s Output Index dropped for the seventh consecutive month to 91.4 in December, from 92.5 in November. The Index – which measures turnover expectations three months ahead – has now remained below the crucial 95.0 mark that indicates growth since July 2011.

Meanwhile BDO’s Optimism Index - which predicts business confidence in two quarters’ time - dropped to 91.5 in December from 92.5 in November. This move away from the crucial 95.0 mark heads dangerously towards the low figures seen at the turn of 2008-2009 when the UK was gripped by recession.

However, while the outlook is gloomy, one cause for relief is that inflationary pressures are beginning to ease. For the fifth consecutive month, BDO’s Inflation Index came down, with December’s figure only marginally higher than at the start of 2011 (a 1.6 point increase). The decrease in the Inflation Index is welcome news for consumers, who will consequently feel less of a squeeze in 2012.

Peter Hemington, Partner, BDO LLP, commented: “As our data shows, there are areas for cautious optimism in the year ahead but it is apparent that the UK economy has reached a crunch point. The Government must respond decisively if the UK is to avoid a period of prolonged contraction.

“To arrest the forecasted slump, we urge the Bank of England to consider a further round of quantitative easing, and we encourage the banks to continue to step up their lending to UK businesses.

“We also want to see the Government introducing measures in 2012 that encourage private sector investment in infrastructure. We welcome the investment in high-speed railways, but want to see more immediate measures introduced – 2026 is a long way off.  And we remain of the view that the Government’s attempts to rein in current spending have given it the credibility to be bolder in borrowing more to finance infrastructure spending.”

To read the full report, click here: BDO Business Trends Report Jan 2012

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Contact details

Charlie Eccleshare, Veronica Rossini or Juliana Bruton at Blue Rubicon on behalf of BDO LLP

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Email: bdo@bluerubicon.com

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Notes to editors

BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU.  BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.

The combined fee income of all the BDO Member Firms, including the members of their exclusive alliances, was €4.06 billion in 2011. The global network provides business advisory services in 135 countries, with almost 48,800 people working out of 1,118 offices, worldwide.

BDO is the brand name for the BDO International network and for each of the BDO Member Firms.

BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms.

 

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.