Business confidence surpasses expectations

Business confidence has continued to improve in October and suggests the economic recovery will remain strong in Q4 2013 and could gather pace going into Q1 2014, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.

BDO’s Optimism Index, which predicts business performance two quarters ahead, increased from 100.7 in September to 101.7 in October, outperforming the 100.0 mark that indicates the economy’s long-run average growth rate and echoing the CEBR’s prediction that the economy will now expand by 2.7% in 2014.

Expectations that growth may pick-up speed are being driven by an economy-wide recovery, with optimism in the services sector, which accounts for over three-quarters of the UK economy, rising to 99.9 in October from 99.2 in September and optimism among manufacturers rising to 109.6 from 107.0.

In further encouraging news, there is evidence that the rise in BDO’s Output Index, which predicts short-run turnover expectations, has been driven by an increase in new export orders from the Eurozone. Both the manufacturing and services sub-indices, which collectively account for the overwhelming majority of the economy, increased strongly in October, driving the headline figure up from 99.5 to 100.7. Overall, the improved Output Index points to a strong end for 2013.

BDO’s Employment Index continues to trail the broader economic recovery, rising modestly from 97.5 in September to 98.1 in October. It will be important to watch hiring intentions over the coming months. Stronger hiring intentions could signal a declining unemployment rate. This would give the Bank of England’s Monetary Policy Committee room to raise interest rates once unemployment falls to the 7.0% waypoint, from a current reading of 7.7%.

Graham Randall, partner and head of BDO LLP in Bristol, commented: “With broad-based recovery now a reality, as he looks towards the Autumn Statement, the Chancellor has room for manoeuvre.

“Recent measures have prompted recovery on the demand side of the economy, but the Chancellor risks bottlenecking growth unless he turns his attention to unlocking the supply side. As public sector finances improve, there is flexibility to increase investment in areas such as house building, along with the additional benefit of giving the construction industry a much-needed boost.”

Overview of the BDO indices:

An overview of all four indices is provided in the table below, detailing figures for the last three months and the same month of the previous year, to allow for comparison.