The UK economy has had a stuttering start to 2019, with output in the manufacturing sector plunging to its lowest point since October 2017, according to new research from accountants and business advisors BDO LLP.
BDO’s Manufacturing Index, which tracks business output growth in the sector, fell by 0.23 points to 98.37 in January. Although manufacturing firms have been ramping up their preparations in anticipation of a disorderly Brexit, January’s decline points to an underlying weakness in the sector. It is likely that stockpiling activity has masked an even greater fall in output than is suggested by these figures.
In the month that Theresa May saw her proposed EU Withdrawal Agreement crushed by MPs, UK business confidence also suffered a significant decline. BDO’s Optimism Index, which tracks firms’ expectations of their performance over the coming months, fell from 100.16 to 99.98 in January. This marks a decrease of 2.11 points from January 2018 and is the first time that the index has fallen below 100 since December 2016.
The manufacturing sector was worst hit by the collapse in confidence, with BDO’s Manufacturing Optimism Index falling 0.5 points to 104.4 in January. This reflects concerns raised by manufacturers including Nissan, Airbus and Siemens, who have repeatedly warned that uncertainty around the UK's future relationship with the EU is not helping companies plan for the future.
The UK’s services sector - which is critical to the success of the economy, accounting for approximately 80 per cent of GDP – also experienced a malaise. At 97.10, output remains well below the long-term average growth rate of 100, despite witnessing a marginal improvement in January.
Commenting on the BDO Business Trends Report’s findings, Peter Hemington, Partner at BDO LLP, said:
“Since the EU referendum result in July 2016, our indexes show that business output has declined by 2.45 points while confidence has slumped by 2.8 points.
“Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels. So the underlying slowdown is probably rather worse than suggested by our headline figures. Stripping out the impact of these Brexit preparations, there is a real risk that the economy will contract in the first quarter.
“It’s too late to do anything about this now. But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so. With now just 46 days to go, we are concerned it looks more likely than ever that we will exit the EU without a deal. We believe that the government should seek an extension to Article 50 as soon as practicable to give itself the time to reach an acceptable Brexit compromise.”
To download BDO’s New Economy report and find out more visit www.neweconomy.bdo.co.uk
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.
(figures for this report)
(equivalent report last year)
|BDO Optimism Index
|BDO Output Index
|BDO Inflation Index
|BDO Employment Index
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The BDO global network provides business advisory services in 162 countries, with 74,000 people working out of 1,500 offices worldwide. It has revenues of $8.1bn.
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.
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