Economic activity set to surpass pre-recession levels by July

Nearly six years after the global financial crisis first hit, the economy is finally set to grow past its pre-recession level in the second half of this year, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.

The predicted growth is fuelled by markedly strong optimism and hiring intentions across all sectors of the economy, with manufacturers in particular feeling very positive about the future.

The positive outlook is supported by BDO’s Output Index, which has risen to 102.7 in February from 102.3 in January, to stand at its highest level since April 2010. The Output Index is a resilient indicator of growth with figures predicting continually high business performance for the coming months.

In particular, BDO’s Output manufacturing sector sub-index, often a strong indicator of economic health, has charged ahead by rising to 112.0 in February, compared to 111.3 last month. This is despite recent currency fluctuations working against manufacturers, so the unrelenting growth identified by the manufacturing sub-index underlines the strength of the sector’s recovery.

Inflationary pressures on UK businesses also continued to ease in February: the BDO Inflation Index dropped from 97.9 in January to 97.1, as falling real wages helped services firms control costs and falling input prices, driven by weak global demand, helped manufacturers.

The positive economic picture on the ground is supported by encouraging expectations further ahead, as BDO’s Optimism Index, which predicts business performance in two quarters’ time, remained stable. Confidence among businesses dropped slightly in February to 103.3 from 103.8 on the index last month, but remains comfortably above the 100 level which indicates the economy’s long-term growth trend.

It’s also good news for consumers, as BDO’s Employment Index, which reflects businesses’ hiring expectations over the next three months, showed a healthy rise to 102.7 in February from 101.3 January. With unemployment falling and output increasing, real wages look likely to grow during 2014 for the first time since the onset of the financial crisis, indicating that the end of the squeeze on incomes is in sight.

Commenting on the latest findings, Graham Randall, partner and head of BDO LLP in Bristol, said: “On its current trajectory, we expect economic output to surpass the level last reached before the onset of the financial crisis by July this year, which will be a great relief to the Chancellor as we near the Budget. What’s more, the recovery has well and truly taken hold across all sectors, with manufacturing in particular driving strong job creation.

“However, as the remaining spare capacity in the economy is spent, the spectre of a skills shortage is likely to rear its head again, which could become a new drag on growth. There is increasing evidence that immigrants make a disproportionately positive contribution to our economy. It is vital that our political class takes notice of this evidence and starts to embrace immigration as a force for good in generating economic success.”

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.