By Daniel Hunter

Business confidence continued to decline this month, as the BDO Optimism Index fell to its lowest reading since the report began 21 years ago, according to the latest Business Trends report by accountants and business advisers BDO LLP.

BDO’s Optimism Index, which predicts business performance two quarters ahead, fell to 88.9 in January from a reading of 90.3 in December - the eighth consecutive month that the Index has remained below 95.0, the mark which indicates growth.

This suggests the economy will struggle to grow in Q1 2013 which, following the recently announced negative growth of Q4 2012, poses the risk of a triple-dip recession. BDO’s Output Index, which predicts short-run turnover expectations, also supports this, falling from 93.1 to 92.3 last month, further away from the 95.0 mark indicating growth.

Despite this business pessimism, there are signs of improving confidence. BDO’s Employment Index, which measures businesses’ hiring intentions over the next two quarters, rose to 95.1 in January from 93.0 in December, taking the Index above the 95.0 mark that indicates employment growth.

It is the first time the Index has stood above 95.0 since April 2012 and supports the latest ONS Labour Market figures which saw unemployment fall back to 7.7% in the three months to November, down from 7.9% in the previous quarter.

Equally, the rallying confidence of manufacturers provides cause for cautious optimism, with both their Output and Optimism scores increasing this month. Optimism for manufacturing firms rose to 95.2 in January from 91.9 in December, while their Output Index score, indicating manufacturers’ order book strength, increased to 92.3 in January from 90.6 in December.

“In spite of a strengthening Labour Market, business confidence continues to weaken, and improved hiring intentions are not translating into growth plans," Peter Hemington, Partner, BDO LLP, commented.

"It seems the damaging effects on businesses of five years’ zigzagging economic growth, has left them wary of making concrete plans for expansion and resigned to the ‘new normal’ of economic stagnation.

“To end this cycle, it is imperative that the Government implements plans to expedite growth. Without growth incentives, we will continue to see UK businesses reluctant to invest and expand, which poses a grave threat to the UK’s economic recovery.”

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