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Short term business prospects pick-up, predicting economic growth

Short term business prospects pick-up, predicting economic growth
Wednesday April 18 2012

A leap in businesses’ output expectations signals a significant move towards economic growth, according to the latest Business Trends report by accountants and business advisors BDO LLP.

BDO’s Output Index, which points to business conditions one quarter ahead, has risen above the crucial 95.0 mark that indicates growth for the first time since summer 2011, indicating positive economic growth for mid-2012. The increase from 93.5 in February to 95.7 in March puts the Output Index at its highest level for nine months, suggesting that short term economic prospects for the UK will continue to strengthen.

Yet looking further forward, business confidence for the second half of the year is more muted. BDO’s Optimism Index – which predicts business performance two quarters ahead - fell from 98.0 in February to 96.7 in March. It remains above the important 95 level, but lingers below the robust 100.0 mark that equates to average UK trend growth. This suggests the recovery is headed in the right direction, but moving there slowly.

Similarly, a knock to the Manufacturing Optimism Index indicates poorer prospects for the back end of 2012. Confidence has fallen below 95, from 96.9 in February to 94.6 in March, signifying that businesses are expecting manufacturing growth to slow later in the year. This can be attributed to stubbornly high crude oil prices, as well as sluggish growth in the eurozone area – a key export market for UK goods - heightened by fears regarding Spain’s ability to repay its increasing debts.

Peter Hemington, Partner, BDO LLP, commented: “It’s encouraging to see positive signs for UK growth in the short term, but it’s two steps forward followed by one step back at the moment, as the overall recovery is likely to be a slow one. Businesses face low demand from Europe and China and high commodity prices globally, meaning tough trading conditions for UK exporters.

“It’s vital that the Government takes steps to ensure the economic recovery is broad-based - long term economic success hinges on a stable and confident manufacturing sector. If British firms are to meet the Chancellor’s recent challenge to double exports to £1 trillion by 2020, then they’ll need a clearer and more explicit framework and strategy to relieve pressure on manufacturers and encourage investment in infrastructure and innovation.”

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