By Marcus Leach

The UK faces a difficult winter, as the eurozone crisis, a faltering manufacturing sector and a weak labour market undermine business confidence - according to the latest Business Trends report by accountants and business advisors BDO LLP.

In November, BDO’s Output Index dropped to 92.5, its lowest level since June 2009. The Index — which measures turnover expectations three months ahead — has remained below the crucial 95.0 mark that indicates negative growth since July 2011, suggesting that the UK economy could have already entered a period of contraction in Q4 2011.

Forecasts for the first half of 2012 are equally gloomy. BDO’s Optimism Index - which predicts business confidence in two quarters’ time - saw a considerable drop from 94.1 in October to 92.5 in November. In addition, the Optimism Index has remained below 95.0 since September 2011. Taken together, these figures paint a picture of possible economic contraction into the first half of 2012.

This lack of business confidence can be attributed to the ongoing crisis in the Eurozone, a key trading partner for the UK and accounting for around 50% of all UK goods exports. The effects of this are particularly evident in the export-reliant manufacturing sector, where the Optimism Index for the sector plummeted by 8.1 points in a month, from 94.3 in October to 86.2 in November.

Of equal concern are weakening conditions in the private sector labour market, where BDO’s Employment Index fell from 93.4 in October to 91.5 in November. The deterioration in private sector employment conditions suggests the sector will be unable to offset the increased public sector job losses, recently revised upwards from 400,000 to 710,000 by the Office for Budget Responsibility.

“The ongoing uncertainty in the Eurozone is evidently plaguing UK business confidence. The Government’s focus on cutting the deficit should secure the UK greater financial credibility in international markets - making it a safe haven for lenders. We believe it is imperative that the government adopt a more liberal approach to borrowing, enabling larger scale government investment in infrastructure," Peter Hemington, Partner, BDO LLP, commented.

“While the commitment to inject £5 billion into infrastructure projects announced by the Chancellor in his Autumn Statement is welcome, we would therefore like to see more dramatic steps taken. In particular, housing projects are crying out for government finance which would throw a lifeline to the UK’s stuttering recovery.”

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