Optimism among UK businesses has fallen to a 20-year low, hitting depths not seen since comparable data began in 1992, according to the latest Business Trends report from accountants and business advisers BDO LLP.
BDO’s Optimism Index, which predicts business performance two quarters ahead, suggests the economy will continue to contract at the start of 2013. The index fell to 89.1 in August from 93.1 in July. This is the sixth consecutive month that the data has registered a drop, with a four-point plunge from 93.1 in July. Business confidence is now at its lowest level since the Business Trends indices began in 1992, and significantly below the crucial 95 mark which would indicate a return to growth.
BDO’s Output Index - which predicts short-run turnover expectations - has also fallen sharply, from to 90.8 in August from 93.9 in July, reaching its lowest point for 40 months. This drop neutralises hopes of recovery in the short-term. This is crystallised by data from the UK’s all important service sector – which makes up more than three-quarters of the UK’s economy – which registered a steep drop over the last month, to 92.2 in August from 95.1 in July.
Mirroring the decline in the Optimism and Output indices, BDO’s Employment Index fell to 92.1 in August. With the private sector unlikely to absorb further forthcoming public sector job cuts, conditions for UK job seekers are unlikely to improve before the end of the year.
Peter Hemington, Partner, BDO LLP, commented: “The sluggish economic environment continues to elicit zigzagging business sentiment, with confidence now at its lowest level since Business Trends began nearly 20 years ago.
“The Government’s efforts to cut current spending may not be working out quite as planned, though we believe that the strategy in essence remains correct. But we have long been concerned that the cuts to investment spending were too drastic and that steps to redress this have been taken too slowly. We welcome positive signs that the government now wishes to boost its investment in UK infrastructure.”
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Notes to editors
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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.