By Daniel Hunter

UK business confidence is at its highest point since May 2012, pointing to improved business conditions for the rest of 2013, 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, moved up for the fourth consecutive month, to 93.6 in May from 93.0 in April. BDO’s Output Index, which predicts short-run turnover expectations, also improved in May, to 94.4 from 94.1, an 11-month high. The Output Index for manufacturers showed particular improvement, moving up substantially from 90.8 to 93.7.

Improving confidence is feeding in to businesses’ hiring intentions. The BDO Employment Index, which measures UK businesses’ hiring intentions over the next two quarters, rose to 96.6 in May, the index’s highest since August 2011. This is the fifth consecutive month that the index has been at or above the crucial 95.0 level that represents employment growth, and indicates that the private sector will help to offset the effects of continuing public sector job cuts.

However, in spite of these improvements, dangers to the UK’s economic recovery remain. Inflationary expectations rose again in May, as the BDO Inflation Index climbed to 104.2 from a previous reading of 103.4. This is the highest reading for the Index since January 2012 and points to rising costs for businesses, which could impact on their bottom lines.

In addition, although business confidence has improved, both the Optimism and Output indices remain below the 95.0 mark that indicates growth. This suggests that although business conditions are improving, risks still remain to the UK’s economic outlook.

“It’s encouraging to see that UK business confidence has continued its upward trend, and that businesses have retained their healthy hiring intentions for a fifth consecutive month," Peter Hemington, Partner, BDO LLP, commented.

“However the Government must do more to achieve the robust economic growth that remains tantalisingly out of reach. The Government must look to ensure more funds are reaching British businesses through lending, in order to help them drive the UK’s economic recovery.”

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