By Marcus Leach

UK business confidence has reached a 26-month low, suggesting an increased likelihood of a return to negative growth for the economy in the quarter ahead, according to the latest Business Trends report by BDO LLP.

The BDO Output Index — which measures UK businesses’ short-run turnover expectations - fell to 93.6 in August, its lowest level since June 2009.

This takes the index below the crucial 95.0 mark that indicates growth. In addition, the Optimism Index, which predicts business confidence two quarters ahead, is also teetering around this point for the third consecutive month, with a similarly subdued figure of 95.5. This suggests that at best, protracted, marginal growth will persist at the start of 2012.

Despite the weak data pointing to poor growth prospects, it does not necessarily predict a return to recession, or two consecutive quarters of negative growth.

This month’s figures mirror those seen throughout Q4 2010, where Output wavered beneath the 95.0 level. Importantly now, however, the Optimism index is more buoyant than the Output Index, suggesting that negative growth is likely to be short-lived.

“It’s worrying to see such a reliable growth indicator fall to a two-year low. Our predictions should serve as a wake-up call to policymakers that action must be taken to avoid economic contraction," Peter Hemington, Partner, BDO LLP, commented.

“Those asking for a rise in interest rates are doing so prematurely. What is needed and what we have long called for is a further round of quantitative easing, and it is heartening to see this stance becoming an increasingly credible position. The MPC must therefore give QE3 profound consideration if we are to arrest the forecasted economic slump.”

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