Manufacturing optimism reaches 20-month high

06 February 2017

UK service sector confidence at 14 month high

The Brexit and Trump effects have not dented UK business optimism as manufacturing confidence has reached a 20-month high, according to the latest Business Trends Report by accountants and business advisers BDO LLP.

The latest report shows continuing signs of encouraging economic prospects for the UK over the coming six months, despite uncertainty following the US Presidential Election and the UK’s decision to leave the European Union. BDO’s Optimism Index, which indicates how firms expect their order books to develop in the coming six months, continues to rise and now sits at 103.7 from 102.2 in December, above its long term trend.

The Optimism sub-indices for both manufacturing and services are also higher this month, dismissing claims that the UK has a two-speed economy. Manufacturing’s sub-index has risen to 102.2 from 99.4, passing the 100 mark, which indicates growth, for the first time since June 2015. The Services Optimism sub-index has also increased from 102.7 to 103.9 this month, a 14-month high.

More positive news is that BDO’s Output Index - which indicates how businesses expect their order books to develop in the next three months - has increased for the third consecutive month, rising slightly from 97.4 to 97.5. This is another demonstration of the resilience of the UK economy since the EU referendum decision.

BDO attributes the positive performance of UK businesses to an overall improvement in the global economy, the decrease in the value of sterling and better-performing key export markets.

However, despite the immediate benefit of sterling’s sharp fall in value and the optimistic mood of UK businesses, sterling’s devaluation represents a double-edged sword as it continues to contribute to rising inflation.

BDO’s Inflation Index has increased to 104.5 from 103.8 and the upward trend is set to continue.  While currency depreciation makes British exports more price competitive, firms’ input prices have risen sharply, squeezing margins. In January, Markit/CIPS PMI showed factory raw material costs rose at their fastest pace in over 25 years, a result of higher prices for oil, steel and other import costs.

For the manufacturing sector to continue to thrive following Brexit, UK manufacturers need to invest now to automate and digitise key business processes to remain competitive in a more dynamic and technologically advanced market. BDO’s New Economy report, which makes a number of policy recommendations for a thriving post-Brexit UK economy, calls on the Government to increase funding to support investment and help businesses modernise themselves for the challenges ahead.

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

“The UK economy seems to be remarkably resilient. British businesses are surprisingly confident about the short term, encouraged by the opportunities our cheaper currency and a better-performing global economy have created. These have provided a much-needed short-term boost for our economy, particularly our manufacturers.

“However, government still has much to do in these uncertain times if the UK is going to stay on the right economic track.

“The modern industrial strategy could be a step in the right direction. More importantly, simplifying regulation and taxes, and improving our education and training systems are high priorities for businesses in the new economy.  And with government borrowing costs still close to all time lows, the opportunity to replace our worn out infrastructure is still an enticing one.”

To download BDO’s New Economy report and find out more visit www.neweconomy.bdo.co.uk  

- 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.

 

January 2017

(figures for this report)

December

2016

November

2016

January 2016

(equivalent report last year)

BDO Optimism Index

103.7

102.2

98.0

100.0

BDO Output Index

97.5

97.4

97.1

101.8

BDO Inflation Index

104.5

103.8

103.6

96.7

BDO Employment Index

101.9

101.1

100.9

104.9

Notes to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world.

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

We share our clients’ ambitions and their entrepreneurial mind-set. We have the right combination of global reach, integrity and expertise to help them succeed. 

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 has revenues of £405m and is the UK member firm of the BDO International network.

BDO International

The BDO International network provides business advisory services in 158 countries, with 68,000 people working out of 1,400 offices worldwide. It has revenues of $7.6bn. 

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 28731
Tel: 0207 260 2700
Email: bdo@teneobluerubicon.com