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Largest surge in business optimism in a decade, but coronavirus could reverse gains

09 March 2020

- BDO report finds greatest increase in optimism in 10 years as businesses respond to improved trading conditions and greater political certainty 

- Impact of COVID-19 could erode gains in the weeks ahead 

Optimism across businesses in the UK jumped by the largest margin in a decade in February, according to figures from the latest BDO Business Trends report, but the prospect of the continued spread of COVID-19 (coronavirus) could threaten to reverse much of the gains.

BDO’s Optimism Index, which provides the most comprehensive snapshot of business sentiment by weighting macroeconomic data from the UK’s main business surveys, rose by 5.80 points in February and now stands at 101.64 – above the 100 level which represents the historical average.

The services industry experienced the sharpest rise as businesses welcomed the ending of the Brexit stalemate following the UK’s departure from European Union.   

The surge in confidence reflects the underlying improvement in business conditions as a result of a more certain political and economic outlook, particularly around Brexit, after a long period of instability. It follows three months of marginal increases in optimism as businesses appeared to be in ‘wait and see’ mode in the immediate aftermath of the General Election.

Historically, however, major macroeconomic shocks can knock several points off BDO’s Optimism Index, which means coronavirus could wipe out the gains made in February.

Commenting on the results, Kaley Crossthwaite, Partner at BDO LLP, said: “We have just witnessed the most significant uplift in business optimism in 10 years, and the impact of greater political and economic certainty brought by a new majority Government should not be underestimated. However, businesses will now be spending the coming weeks focussed on mitigating the uncertainty caused by coronavirus.”

The overall jump in business confidence in the UK was driven by BDO’s Services Optimism Index, which increased by 6.52 points to 102.38, while the Manufacturing Optimism Index rose marginally in February by 0.13 points to 95.82. The comparatively smaller rise in manufacturing optimism reflects the fundamental problems facing the sector, including the higher cost of trade that will be imposed by leaving the EU.

Elsewhere in BDO’s Business Trends report there were clear signs of the impact of coronavirus. BDO’s Inflation Index fell by 0.48 points to 95.59, largely driven by dwindling commodity prices caused by factories in China temporarily shutting. Input Inflation fell by 2.01 points to 92.33 as a result of fluctuations in global commodity markets.

Kaley Crossthwaite added: “The next month will be crucial in determining whether this optimism can remain, or if the ‘Boris Bounce’ will be brought back down to earth by the impact of the coronavirus outbreak. For once in recent times, it may be something other than the political landscape holding the UK economy back.”

To download BDO’s Business Trends 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. 100 = average value. Above 95 = positive.

 

February 2020 (figures for this report)

January

2020

December

2019

February

2019  

BDO Output Index

96.64

95.88

96.47

98.32

BDO Optimism Index

101.64

95.84

95.72

99.79

BDO Inflation Index

95.59

96.07

95.27

97.41

BDO Employment Index

112.86

112.46

112.25

113.99

 

Note 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 17 locations across the UK, employing nearly 5,500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network

The BDO global network provides business advisory services in 167 countries, with 88,000 people working out of 1,800 offices worldwide. It has revenues of $9.6bn. 

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.