By Daniel Hunter

UK business confidence is weakening, as the BDO Output and Optimism indices retreated from the crucial 95.0 mark that indicates growth, according to the latest Business Trends report by accountants and business advisers BDO LLP.

This is the seventh consecutive month where both indices have remained below 95.0, pointing to economic contraction ahead. Following a marginal improvement in Q4 2012, the Output Index — which predicts short-run turnover expectations - decreased to 93.1 from a reading of 93.4 last month.

This suggests that the UK may experience further contraction in Q1 2013, potentially resulting in a triple-dip recession, following the anticipated negative growth of Q4 2012.

The picture two quarters ahead is equally bleak, with BDO’s Optimism Index dropping to a lowly 90.3 from 91.4 in December’s report. UK businesses’ declining confidence is partly attributable to ongoing nervousness in the US where there has still not been a final agreement on the spending reductions associated with the ‘fiscal cliff’. The uncertainty caused by this delay will test UK business confidence in Q1 2013, while ongoing recession in the Eurozone is likely to dampen UK growth prospects this year.

BDO’s Employment Index, which measures businesses’ hiring intentions over the next two quarters, also remained subdued this month. The Index fell to 93.0, and has been below the crucial 95.0 level which would indicate employment growth for eight consecutive months. With further public sector job cuts expected in 2013, the reluctance of the private sector to take up the slack points to a weak labour market in the early part of this year.

“Our latest report indicates that many UK businesses are in a state of limbo, as ongoing volatility in the US and eurozone, coupled with sluggish UK GDP growth, is leaving them reluctant to hire and make plans for growth," Peter Hemington, Partner, BDO LLP, commented.

“Diversifying trade from the unstable eurozone is a must, and it is heartening to see the UK trading more with alternative regions; official figures released last week show that the eurozone now makes up only around 50% of UK exports.

“Domestically, the government must implement measures to expedite growth for UK businesses, especially within the struggling manufacturing sector. To do this, we would like to see incentives which encourage manufacturing businesses to invest and make concrete growth plans.”

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