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BDO Business Trends: UK business confidence at record high

10 February 2014

Optimism in services and manufacturing suggests accelerated economic growth ahead

UK business optimism reached its highest level for 22 years in January, indicating that the economy will continue to grow rapidly over the coming six months, according to the latest Business Trends report by accountants and business advisers BDO LLP.

The BDO Optimism Index, which predicts business performance two quarters ahead, reached 103.8 in January, up from 103.4 in December. This is the highest reading ever recorded since readings began 22 years ago and sits well above the 100.0 mark, meaning the UK is expected to outperform its long-term historical growth trend.

In the manufacturing sector, the Optimism sub-index rose to a new all-time high of 117.1 in January, up from 115.5 in December. And for services, which accounts for roughly three quarters of the UK economy, confidence rose to 101.2 in January, up from 100.7 in December.

In tandem with improved confidence, businesses' hiring expectations increased markedly over January as the BDO Employment Index rose to 101.3, up from 99.4 the previous month. The index now stands at its highest level since August 2008 and above the crucial 100.0 mark for the first time since March 2011, signalling that UK job creation is likely to exceed trend growth over the coming months.

In line with the overall positive outlook, low or negative business cost inflation is helping companies – especially manufacturers – control costs.  The BDO Inflation Index read 97.9 in January, its lowest level since November 2009 and down from 98.7 at the end of last year. Falling input prices have helped manufacturers control costs over the past year and in the all-important services sector, annual wage growth of only 0.9% held down the cost of inflation for labour-intensive services firms.

Peter Hemington, Partner, BDO LLP, commented: "UK business confidence has hit record highs as we enter 2014 and we expect the economy to grow rapidly in the first half of the year. Companies are raising headcounts in response to rising client demand and the data suggests that the unemployment rate is likely to fall below the Bank of England's 7.0% threshold for considering raising interest rates in the very near future. 

"An interesting feature of the recovery so far has been the way in which UK productivity remains at levels last seen in late 2005. Looking at this optimistically, this means that the UK can continue to grow for some time by increasing productivity before wage-related inflationary pressures begin to kick in."

Overview of the BDO indices:

An overview of all four indices is provided in the table below, detailing figures for the last three months and the same month of the previous year, to allow for comparison.

 

 

Jan 2014

(figures for this month's report)

December 2013

November 2013

Jan. 2013

(equivalent report last year)

BDO Optimism Index

103.8

103.4

103.1

88.9

BDO Output Index

102.3

102.5

101.8

92.3

BDO Inflation Index

97.9

98.7

99.7

100.4

BDO Employment Index

101.3

99.4

98.3

95.1

 

- Ends -

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 Markit/CIPS Manufacturing and Services PMI data

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.

Notes to editors

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