Optimism in the economy across the services industry fell sharply in August to levels not seen since 2013, according to a new report from accountants and business advisors BDO LLP.
BDO’s Services Optimism Index collapsed 3.89 points in August to 95.49, only just above the 95 level that indicates that a recessionary mindset has taken hold. This drop in confidence has dragged the overall Optimism Index down by 3.21 points across the month.
The index provides information on future economic developments based on opinion surveys of over 4,000 respondents to constituent surveys and is a good indicator of economic growth in the sector six months ahead. History shows that when confidence falls, it can drive businesses to invest less and hire fewer people, in turn creating the conditions for a recession.
This negativity was reflected throughout BDO’s Business Trends report. BDO’s Employment Index fell by 0.26 points in August. Though this has been the most buoyant economic indicator in recent years, reflecting the UK’s extraordinary ability to create jobs through this economic cycle, the index has now been in decline for eight consecutive months. Elsewhere, BDO’s Output Index also fell by 0.37 points, marking the third month of decline for output.
Peter Hemington, Partner at BDO LLP added: “This month’s dramatic fall in confidence is a very worrying event. Pessimistic companies don’t invest or hire, which is how recessions start. The reason for this has to be that UK businesses have suddenly woken up to the fact that a no deal Brexit is a real possibility.
“This reminds me very much of the aftermath of the 2010 election, when there was a sudden realisation that austerity wasn’t going to be pretty. Sentiment collapsed as a result, and this was the precursor to a long period of very low growth that followed.
“Let’s hope that we can avoid a no deal Brexit, otherwise the next couple of years could be very uncomfortable.”
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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. 100 = average value. Above 95 = positive.
||July 2019 (figures for this report)
(equivalent report last year)
|BDO Output Index
|BDO Optimism Index
|BDO Inflation Index
|BDO Employment Index
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The BDO global network provides business advisory services in 162 countries, with 80,000 people working out of 1,600 offices worldwide. It has revenues of $9bn.
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.
at Headland on behalf of BDO LLP
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