By Daniel Hunter

Business confidence is improving, as the BDO Optimism Index increased by 1.7 points this month following its 21-year low reading in January, according to the latest Business Trends report by accountants and business advisers BDO LLP.

Despite this increase, businesses still do not anticipate growth in the next two quarters and a sharp increase in the BDO Inflation Index points to further pressure on businesses bottom lines.

BDO’s Optimism Index, which predicts business performance two quarters ahead, increased to 90.6 in February from a reading of 88.9 in January, the biggest increase in the index for five months. In spite of this increased optimism, the overall picture remains bleak, with the Optimism Index remaining well below the 95.0 mark which indicates growth, as it has been since May 2012.

BDO’s Inflation Index, which measures inflationary expectations one quarter ahead, increased from 100.4 in January to 101.5 in February, its highest level since September 2012. These added inflationary pressures could hamper business performance over the coming three months.

In addition, BDO’s Output Index, which predicts short-run turnover expectations, saw a decrease from 92.3 last month to 92.1 this month, suggesting that economic conditions will remain tough in three months time. In particular, the services sector continues to struggle, with a reading of 91.5, significantly below the 95.0 mark which indicates growth. This is a cautionary sign for the UK economy, as the services sector accounts for roughly three quarters of total output.

“We encourage the MPC to increase its Quantitative Easing programme, but the Government needs to take further action to ensure that funding goes to where it is most needed - to British business and to the housing market," Peter Hemington, Partner, BDO LLP, commented.

“Not only has the UK got the most consolidated banking market in the G7, it also has the smallest corporate bond market. Action needs to be taken both to address these issues and to help the banks to accelerate economic recovery.”

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