UK business output has risen for the first time after 17 months of decline, suggesting that for now, the UK economy has stabilised, according to the latest Business Trends Report by BDO LLP. However, the growth rate is in a lower gear than it had been running at pre-referendum.
BDO’s Output Index, which indicates how businesses expect to perform in the coming three months ahead, has risen from 96.7 to 97.1 in November.
The UK economy is forecast to grow 1.1% in 2017, according to the International Monetary Funds (IMF), and this is the first rise in over a year in BDO’s Output Index.
However, despite the positive indications of steady growth, BDO’s Inflation Index – which reflects the costs of goods – and BDO’s Optimism Index - which indicates how firms expect their order books to develop in the coming six months - provide warnings of a bumpy road ahead in 2017 for British businesses and the economy.
The Inflation Index, which now sits at 103.6 and is above the long-run trend of inflation, suggests that inflation will rise further as firms start to feel the effect of higher input costs. In addition, consumers are still yet to experience the full effect on the costs of goods following the sharp fall in the value of sterling.
Rising inflation could markedly dent consumer spending in 2017, an essential component of our economy’s growth.
Business optimism continues to fall and now sits at 98.0, down from 98.5 in October. The optimism sub-index for the services industry continues to slump and now sits at 98.7 from 99.8.
Manufacturers, on the other hand, which make up a significantly smaller proportion of UK businesses, have more reasons to celebrate as the cheaper pound contributes to their products being more attractive for overseas buyers. Its optimism sub-index has increased from 92.0 to 94.1.
Peter Hemington, partner, BDO LLP, said:“This uptick in business output is a welcome boost during a turbulent time for businesses and the whole economy. However, businesses remain nervous during this period of Brexit limbo and this nervousness is a significant contributor to the slower rate of growth we are seeing.
“Government can help with this. But the Autumn Statement, with its promises of only tiny increases in infrastructure spending was a disappointment, and a real contrast to the impact of Donald Trump on the US investment scene. There, fears of inflationary spending mean that US Treasuries have ceased to be a one-way bet, exactly what is needed to stimulate productive investment in these unusual times. A big tent approach to Brexit strategy, involving UK business in decision making, will also help.”