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Business output rises for first time in 17 months

12 December 2016

Economy stabilises but in a lower gear than it was pre-referendum
Rising inflation and falling business optimism means a bumpy road ahead in 2017

, according to the latest Business Trends Report by accountants and business advisers BDO LLP.

BDO’s Output Index, which indicates how businesses expect to perform in the coming three months ahead, has risen from 96.7 to 97.1 in November, suggesting that, for now, the UK economy has stabilised in a lower gear than it had been running at pre-referendum.

According to the IMF, the UK economy is forecast to grow 1.1% in 2017, and this first rise in over a year in BDO’s Output Index reflects the beginning of this new slower rate of growth.

However, despite the positive indications of steady growth, BDO’s Inflation Index – which reflects the costs of goods – and BDO’s Optimism Index - which indicates how firms expect their order books to develop in the coming six months - provide warnings of a bumpy road ahead in 2017 for British businesses and the economy.

The Inflation Index, which now sits at 103.6 and is above the long-run trend of inflation, suggests that inflation will rise further as firms start to feel the effect of higher input costs. In addition, consumers are still yet to experience the full effect on the costs of goods following the sharp fall in the value of sterling. Rising inflation could markedly dent consumer spending in 2017, an essential component of our economy’s growth.

Business optimism continues to fall and now sits at 98.0, down from 98.5 in October. The optimism sub-index for the services industry continues to slump and now sits at 98.7 from 99.8. Manufacturers, on the other hand, which make up a significantly smaller proportion of UK businesses, have more reasons to celebrate as the cheaper pound contributes to their products being more attractive for overseas buyers. Its optimism sub-index has increased from 92.0 to 94.1.

Commenting on the findings, Peter Hemington, Partner, BDO LLP, said: 

“This uptick in business output is a welcome boost during a turbulent time for businesses and the whole economy. However, businesses remain nervous during this period of Brexit limbo and this nervousness is a significant contributor to the slower rate of growth we are seeing.

“Government can help with this. But the Autumn Statement, with its promises of only tiny increases in infrastructure spending was a disappointment, and a real contrast to the impact of Donald Trump on the US investment scene. There, fears of inflationary spending mean that US Treasuries have ceased to be a one-way bet, exactly what is needed to stimulate productive investment in these unusual times. A big tent approach to Brexit strategy, involving UK business in decision making, will also help.”

ENDS

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.

 

November 2016

(figures for this report)

October

2016

September

2016

November 2015

(equivalent report last year)

BDO Optimism Index

98.0

98.5

99.5

101.0

BDO Output Index

97.1

96.6

96.9

103.3

BDO Inflation Index

103.6

102.8

102.1

96.3

BDO Employment Index

101.2

100.9

101.2

105.2

Notes to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help our clients navigate a changing world. We share our clients’ ambitions and their entrepreneurial mind-set; we have the right combination of global reach, integrity, collegiate approach and expertise to help them succeed. 

Our clients are Britain’s economic engine – ambitious, entrepreneurially spirited and high-growth businesses that fuel the economy - and the owners and management teams that lead them. 

BDO LLP

BDO LLP operates in 18 offices across the UK, employing 3,500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO International network with revenues over £400m.

BDO International

The BDO International network provides business advisory services in 154 countries, with 64,500 people working out of 1,400 offices worldwide. It has revenues of $7.3bn. 

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.

Contacts

Alexander Dickie
at Teneo Blue Rubicon on behalf
of BDO LLP

Mob: 07876 287318
Tel: 0207 260 2700
Email: bdo@teneobluerubicon.com