Business Trends: Business confidence hits 21-year low signalling economic contraction

19 April 2013

Overall economic outlook remains bleak but labour market and manufacturing sector rally.

Business confidence continued to decline this month, as the BDO Optimism Index fell to its lowest reading since the report began 21 years ago, according to the latest Business Trends report by accountants and business advisers BDO LLP.

BDO’s Optimism Index, which predicts business performance two quarters ahead, fell to 88.9 in January from a reading of 90.3 in December - the eighth consecutive month that the Index has remained below 95.0, the mark which indicates growth. This suggests the economy will struggle to grow in Q1 2013 which, following the recently announced negative growth of Q4 2012, poses the risk of a triple-dip recession. BDO’s Output Index, which predicts short-run turnover expectations, also supports this, falling from 93.1 to 92.3 last month, further away from the 95.0 mark indicating growth.

Despite this business pessimism, there are signs of improving confidence. BDO’s Employment Index, which measures businesses’ hiring intentions over the next two quarters, rose to 95.1 in January from 93.0 in December, taking the Index above the 95.0 mark that indicates employment growth. It is the first time the Index has stood above 95.0 since April 2012 and supports the latest ONS Labour Market figures1 which saw unemployment fall back to 7.7% in the three months to November, down from 7.9% in the previous quarter.

Equally, the rallying confidence of manufacturers provides cause for cautious optimism, with both their Output and Optimism scores increasing this month. Optimism for manufacturing firms rose to 95.2 in January from 91.9 in December, while their Output Index score, indicating manufacturers’ order book strength, increased to 92.3 in January from 90.6 in December.

Peter Hemington, Partner, BDO LLP, commented: “In spite of a strengthening Labour Market, business confidence continues to weaken, and improved hiring intentions are not translating into growth plans. It seems the damaging effects on businesses of five years’ zigzagging economic growth, has left them wary of making concrete plans for expansion and resigned to the ‘new normal’ of economic stagnation.

“To end this cycle, it is imperative that the Government implements plans to expedite growth. Without growth incentives, we will continue to see UK businesses reluctant to invest and expand, which poses a grave threat to the UK’s economic recovery.”

- Ends -

1 Labour Market Statistics, January 2013 

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 4,000 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.  

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