By Daniel Hunter

UK business confidence has fallen to its lowest point this year, with economic prospects following a zigzag path, 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 - has hit a seven-month low, falling for the fifth consecutive month from 93.5 in June to 93.1 in July.

This follows a brief resurgence in business confidence seen in Q1 2012, where confidence reached as high as 98.0, but now reads at the lowest level since December 2011. The index has also moved further away from the crucial 95.0 mark that indicates growth, pointing to contraction for the remainder of 2012.

Fluctuating confidence levels in the manufacturing and services sectors also serve to highlight the zigzag path of UK economic prospects.

Belying the decrease in confidence in the overall Optimism Index, confidence in the manufacturing sector improved substantially in July, moving up from 83.8 in June to 90.5 this month, following a decline of 8.4 points from May to June. The increase of 6.7 between June and July is the highest monthly rise since February 2011 and is likely to be on account of the UK manufacturing sector diversifying its exports, with more than 50% of its trade now being exported to outside the erratic eurozone.

Yet in another divergent move, service sector confidence declined in July, falling by 2.1 points to 93.8. This dip in confidence follows consistent increases between February and May, demonstrating how unsettled optimism levels in key UK sectors are generating the zigzag pattern of business confidence in the overall UK economy. Crucially, this means that both indices remain under the 95.0 mark that indicates growth.

“This month’s figures serve as a stark reminder of the continuing difficulties the UK economy faces, with zigzagging business confidence undermining the improvement in confidence that we saw at the start of 2012," Peter Hemington, Partner, BDO LLP, commented.

“Where there is cause for cautious optimism is in the revived confidence in the manufacturing sector. The sector should be applauded for taking a pragmatic and adaptable approach to diversify exports away from the volatile eurozone. ONS figures in July showed that for the first time more than 50% of the UK’s goods went to countries outside the eurozone.

“Other UK businesses could look to emulate this tactic - opportunity costs, and it may be that their money is better spent marketing elsewhere, looking to the BRICs, CIVETs and the so-called Next 11. In that vein, the Government’s initiative to use the Olympic Games as an opportunity to discuss trade and investment with a variety of Heads of State in a series of summits is laudable.”

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