Business confidence at record high

Business optimism reached its highest level for 22 years in January, indicating that the economy will continue to grow rapidly over the coming six months, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.

The BDO Optimism Index, which predicts business performance two quarters ahead, reached 103.8 in January, up from 103.4 in December. This is the highest reading ever recorded since readings began 22 years ago and sits well above the 100.0 mark, meaning the economy is expected to outperform its long-term historical growth trend.

In the manufacturing sector, the Optimism sub-index rose to a new all-time high of 117.1 in January, up from 115.5 in December. And for services, which accounts for roughly three quarters of the economy, confidence rose to 101.2 in January, up from 100.7 in December.

In tandem with improved confidence, businesses’ hiring expectations increased markedly over January as the BDO Employment Index rose to 101.3, up from 99.4 the previous month. The index now stands at its highest level since August 2008 and above the crucial 100.0 mark for the first time since March 2011, signalling that job creation is likely to exceed trend growth over the coming months.

In line with the overall positive outlook, low or negative business cost inflation is helping companies – especially manufacturers – control costs. The BDO Inflation Index read 97.9 in January, its lowest level since November 2009 and down from 98.7 at the end of last year. Falling input prices have helped manufacturers control costs over the past year and in the all-important services sector, annual wage growth of only 0.9% held down the cost of inflation for labour-intensive services firms.

Graham Randall, partner and head of BDO LLP in Bristol, commented: “Business confidence has hit record highs as we enter 2014 and we expect the economy to grow rapidly in the first half of the year. Companies are raising headcounts in response to rising client demand and the data suggests that the unemployment rate is likely to fall below the Bank of England’s 7.0% threshold for considering raising interest rates in the very near future.

“An interesting feature of the recovery so far has been the way in which productivity remains at levels last seen in late 2005. Looking at this optimistically, this means that the economy can continue to grow for some time by increasing productivity before wage-related inflationary pressures begin to kick in.”

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.