By Daniel Hunter

UK business confidence improved this month, driven by steadily climbing optimism levels in the services sector. However, overall UK business confidence is still below the 95.0 mark that indicates growth, as the outlook for the manufacturing sector remains bleak, according to the latest Business Trends report by accountants and business advisers BDO LLP.

Service sector confidence moved up substantially in April. The services Output Index, which predicts short-run turnover expectations, moved up from 93.2 in March to 94.9 in April.

The service sector makes up roughly three quarters of the economy, so this reading — almost at the crucial 95.0 mark — suggests Q2 2013 has got off to a good start. The services Optimism Index, which predicts business performance two quarters ahead, also went up, increasing to 94.1 from 93.2 last month.

Improving confidence in the service sector contrasts with the manufacturing sector, where business sentiment remains more subdued. The Output Index for manufacturing fell this month from 92.4 to 90.8, retreating further from the crucial 95.0 mark. The Optimism Index for manufacturing meanwhile moved up only 0.1 to a lowly 88.3, a considerable way from 95.0.

In spite of this, increasing confidence in the service sector has fuelled the improvement of overall UK businesses confidence. BDO’s Output and Optimism indices moved up to 94.1 and 93.0 respectively. The former is a monthly uptick of 1.1 points and the highest reading for 10 months, while the latter has moved up 0.8 points from March, the highest it has been since October 2012.

The divergence between the expected fortunes of the services and manufacturing sectors can be partly explained by the impact of increasing inflationary pressures on UK businesses. BDO’s Inflation index rose to 103.4 in April, up from 102.4 in March - the highest score since February 2012. Business costs have been driven up by recent sterling depreciation — raising the prices of energy and soft commodities. These price rises may have been weighing on manufacturing confidence since manufacturers use these inputs intensively.

“We’re pleased to see confidence slowly returning to UK businesses, and the continuing revival of the all important services sector," Peter Hemington, Partner, BDO LLP, commented.

“However, as in previous months, our indices reveal a mixed picture. The manufacturing sector is a particular concern. If it is serious about its plan to rebalance the UK economy, we continue to believe that the Government could do more to help UK manufacturing, particularly by encouraging both lending and investment in the sector. We also still think there is an excellent opportunity for the Government to expedite the UK’s economic recovery by increasing public investment.”

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