By Daniel Hunter
UK businesses are on track to enjoy continued growth in the first half of 2015 even as the Eurozone’s economic prospects deteriorate, according to the latest Business Trends report by accountants and business advisers BDO LLP.
The BDO Output Index, which tracks UK businesses’ order books, held steady at 103.2 in November. This suggests that GDP growth over the next three months should be comfortably above the UK’s long term trend of 2.25%. The Output Sub-Index for the manufacturing sector fell to 109.1, as weak Eurozone growth continued to undermine export orders. However, this was cancelled out by a 0.3 point rise in the services sector Sub-Index, which accounts for three quarters of UK economic output. Overall, this should put UK companies in a strong position for continued robust growth next year.
Despite UK businesses’ underlying strength, the BDO Optimism Index, which tracks how UK businesses expect orders to develop over the near term, fell from 104.6 in October to 103.9 in November. This was largely driven by stalling growth in the Eurozone, the UK’s main trading partner, and demonstrates the UK’s vulnerability to faltering international growth.
Despite this the index, which is a good indicator of economic growth over the next six months, suggests that UK GDP should continue to expand at an annual rate in the range 2.5% to 3%. This indicates that this dip should be seen as a tempering of confidence rather than a slide back into difficult business conditions.
Confidence is being supported by sustained low inflationary pressure on businesses. BDO’s Inflation Index, which predicts businesses’ cost expectations over the next three months, fell for the seventh consecutive month to 95.8 in November. This was reinforced by weak wage growth keeping cost inflation low for labour-intensive services firms and falling oil prices aiding manufacturers.
Echoing the upbeat outlook, BDO’s Employment Index, which records companies’ hiring intentions over the next three months, rose to 113.9 in November from 113.4 in October. This is the fifteenth consecutive monthly rise in the Employment Index and puts it at a new record high as we head towards 2015.
Peter Hemington, Partner, BDO LLP, said: “Despite the gloomy and deteriorating Eurozone economy, UK businesses are successfully weathering the storm and are on course to enter 2015 on the front foot, sustained by solid and continued growth.
“However, delve a little deeper and one developing trend poses cause for concern. Despite UK employment levels being on the up, income tax receipts for the year have been lower than expected. This suggests that the quality of jobs being created is low, while much is being made of job creation as evidence of economic policy success.
“Although the Chancellor has been careful not to trumpet it, one of the reasons the UK is such an economic bright spot in Europe is the pragmatic and flexible approach that he has taken to his deficit reduction plan. This was exemplified by the focus on capital projects that was such a key feature of the Autumn Statement. With UK government borrowing continuing to be very cheap and “red lights flashing” in the world economy, we think that the government should do more in terms of investment in infrastructure to create well paid jobs and keep the recovery surging onward.”