By Daniel Hunter

A turnaround in business confidence suggests that the UK economy is taking tentative steps towards recovery, according to the latest Business Trends report by accountants and business advisors BDO LLP.

BDO’s Optimism Index, which points to business performance two quarters ahead, has surpassed the crucial 95.0 mark that indicates growth, with a reading of 98.0 for February - the highest in nine months.

This represents a huge jump of 3.9 points, the single biggest monthly increase since December 2009. It is also the first time the index has topped 95.0 since last August and demonstrates a considerable improvement from the gloomy 91.5 reading just two months ago.

Encouragingly for the UK’s overall economic recovery, the upturn in business confidence is broad-based. In the services sector - which accounts for roughly 75% of the UK’s output - optimism is especially marked, increasing to 98.3 in February from 94.7 in January and comfortably exceeding the 95.0 growth threshold. Similarly important for the UK, BDO’s Manufacturing Optimism Index jumped to 96.9 in February from 91.3 the previous month.

In addition, February saw inflationary pressures relaxing again; BDO’s Inflation Index fell to 104.0 last month from 105.2 in January, meaning the Index is at its lowest level since July 2010. Inflationary pressures may yet increase as a result of rising oil prices however, which climbed significantly in February to top $125 a barrel - an all-time high in sterling terms.

This risk, coupled with the continuing crisis in the eurozone, could yet derail the UK’s economic recovery and go some way to explaining why prospects for the UK in the near-term remain relatively weak. BDO’s Output Index — measuring turnover expectations three months ahead — improved to 93.5 in February from 91.2 in January, but remains below the 95.0 growth mark, indicating that robust UK growth is unlikely to be immediate.

“It is encouraging to see business confidence improving significantly for the second consecutive month. Increasing optimism across sectors like manufacturing and the all important services sector is particularly welcome," Peter Hemington, Partner, BDO LLP, commented.

“To ensure we continue to see progress and positive Q3 growth as our figures indicate, the Chancellor should use the upcoming Budget to ensure that the UK remains competitive for businesses. Measures that encourage growth, such as further accelerating the reduction in the main rate of corporation tax, will help to achieve this.”

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