Private sector hiring intentions reach six year high

Businesses’ hiring intentions have reached a six year high, approaching levels not seen since before the pre-crisis economic boom in 2005-2007, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.

BDO’s Employment Index rose from 102.7 in February to 104.3 in March. This jump shows businesses’ hiring expectations are at their highest level since June 2008, pointing to expansion in the labour market. This is markedly above trend and suggests that recent falls in unemployment will continue in 2014.

Confidence in employment growth is mirrored by a rise in optimism. BDO’s Optimism Index shows business sentiment returned to January’s all-time high of 103.8 in March (up from 103.3 in February). This was buoyed by strong optimism among manufacturers with the sub-index rising to 119.4 in March, up from 118.2 the previous month. The services sector also sustained a robust reading, and remains broadly unchanged at 100.8 meaning both the manufacturing and services indicators point to on-going, solid economic growth for the next six months.

The positive outlook of businesses is supported by the ongoing rise in BDO’s Output Index, which reached its second-highest recorded reading of 102.9 in March, up from 102.7 the previous month. The index has only ever been higher in May 2006, in the middle of the pre-crisis boom when credit was abundant. This indicates that the economy is expanding at a rate well above its long term trend.

Persistently low inflation is likely to have contributed to growth expectations. Inflationary pressures on businesses held steady in March, as BDO’s Inflation Index remained unchanged on February’s figure of 97.1. While unemployment falls but underemployment stays high, competition for jobs is likely to remain fierce and labour-intensive services firms will continue to benefit from relatively low wage growth. Until this remaining spare capacity in the economy is spent, inflation is likely to linger close to the Bank of England’s 2% central target.

Commenting on the latest findings, Graham Randall, partner and head of BDO LLP in Bristol, said: “After a difficult few years, the above-trend growth we’re seeing in businesses’ hiring intentions bodes well for George Osborne ahead of the election. The Chancellor cannily qualified his recent pledge to create a ‘full employment’ economy. But with growth strongly on track and employment levels rising, he may be able to claim success sooner than might be expected.

“Just as importantly, our data sheds an interesting light on the immigration debate. Our data shows that employers are growing their hiring intentions month on month. If we are to avoid skills shortages and the wage inflation that will inevitably follow, we are going to need to attract more workers to our shores.

“However, recent evidence suggests that foreign students, a vital pillar of our education system and a source of overseas earnings, have been put off coming to the UK. The strident tone of the debate perhaps may put talented professionals off working here too. The harm that this will do to the economy is something we should all strive to avoid.”

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.