Business prospects reach 29-month high and point to robust growth

Short-term business prospects have continued their sharp improvement this month and reached the highest level since March 2011, according to the latest Business Trends report by accountants and business advisers BDO LLP in Birmingham.

BDO’s Output Index, which predicts short-run turnover expectations and reflects the current experience of businesses, climbed to a 29-month high of 98.3, up from 96.8 in July. The figure is close to the 100.0 mark that indicates long run average trend growth, and suggests the economy is poised to experience robust growth in the next quarter.

Output in the services sector, which makes up roughly three quarters of the UK economy, rose from 96.5 in July to 97.7 in August, while the manufacturing sector rose above 100.0 to 100.7 in August from 98.3 in July.

Business confidence also continued to rise. BDO’s Optimism Index, which predicts business performance in two quarters time, increased for the seventh consecutive month – from 95.6 in July to 98.0 in August – its highest level since May 2011 and closer to the important 100.0 mark.

The services sector recorded a healthy Optimism score of 97.7, while manufacturing confidence, buoyed by improving conditions in the Eurozone, leapt up from 91.4 in July to 99.6 in August.

Improving business conditions and confidence are not being matched by a corresponding pick up in companies’ hiring intentions however. BDO’s Employment Index remained at the same 97.0 level as in July and the Index has only moved up by 0.6 points in the last five months. The relative stasis is consistent with official figures which show that between April and June 2013, the unemployment rate was 7.8%, barely down on the same period one year earlier.

Mark Anslow, partner and head of BDO LLP in Birmingham, commented: “We’re encouraged to see that business conditions and confidence are continuing to improve, and that the economy is set for relatively robust expansion for the remainder of 2013.

“However the sting in the tail is that the improvement is not being reflected in businesses’ hiring intentions. This is particularly pertinent given the Bank of England Governor Mark Carney’s decision to peg interest rates to unemployment levels. Our data suggests that Carney’s target may remain elusive and interest rates will remain at their record low for some time. We’re likely to see more public sector job cuts in the next 12 months and as Carney recently pointed out productivity in 2013 remains stuck at the same level it was in 2005. This means that that the pick-up in business output may at least be partially absorbed by higher levels of output per worker.”

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.