By Marcus Leach

The UK economy stands on the precipice of contraction, with businesses’ turnover expectations falling further in December.

However, easing inflationary pressures may help prevent the UK from falling off the precipice - according to the latest Business Trends report by accountants and business advisors BDO LLP.

The overall forecast for the UK economy remains bleak. BDO’s Output Index dropped for the seventh consecutive month to 91.4 in December, from 92.5 in November. The Index — which measures turnover expectations three months ahead — has now remained below the crucial 95.0 mark that indicates growth since July 2011.

Meanwhile BDO’s Optimism Index - which predicts business confidence in two quarters’ time - dropped to 91.5 in December from 92.5 in November. This move away from the crucial 95.0 mark heads dangerously towards the low figures seen at the turn of 2008-2009 when the UK was gripped by recession.

However, while the outlook is gloomy, one cause for relief is that inflationary pressures are beginning to ease. For the fifth consecutive month, BDO’s Inflation Index came down, with December’s figure only marginally higher than at the start of 2011 (a 1.6 point increase). The decrease in the Inflation Index is welcome news for consumers, who will consequently feel less of a squeeze in 2012.

“As our data shows, there are areas for cautious optimism in the year ahead but it is apparent that the UK economy has reached a crunch point. The Government must respond decisively if the UK is to avoid a period of prolonged contraction," Peter Hemington, Partner, BDO LLP, commented.

“To arrest the forecasted slump, we urge the Bank of England to consider a further round of quantitative easing, and we encourage the banks to continue to step up their lending to UK businesses.

“We also want to see the Government introducing measures in 2012 that encourage private sector investment in infrastructure. We welcome the investment in high-speed railways, but want to see more immediate measures introduced — 2026 is a long way off. And we remain of the view that the Government’s attempts to rein in current spending have given it the credibility to be bolder in borrowing more to finance infrastructure spending.”

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