Business confidence begins to plateau – BDO

Confidence among businesses fell for the first time in six months in August, indicating that world events are bringing the bullish streak in business confidence to an end, according to the latest Business Trends report by accountants and business advisers BDO LLP in Southampton.

The BDO Optimism Index, which predicts businesses’ growth expectations over the next six months, is still well above the 100 mark that indicates long-term average growth, however it fell for the first time in six months to 105.0 in August (from 105.1 in July).  Although small, the drop gives a firm indication that economy-wide growth may plateau during the remainder of 2014, driven mainly by a steep decline in manufacturing optimism.

Manufacturers’ confidence fell from 119.9 in July to 118.8 in August. In addition to confidence returning to traditional levels from 2014’s earlier above-average rates, weak demand in the Eurozone is likely to have contributed to this fall as the sector relies heavily on exports to European nations.

A 0.1 point rise in the sub-index for the services sector did not provide enough upward momentum to offset the drop in manufacturing, even though services firms account for over three quarters of the economy.

In contrast, the BDO Output Index, which predicts short-term growth expectations, remained broadly stable at 103.8, rising from 103.7 in July. This modest 0.1 point rise provides further proof that the speed of growth will level off, having shown strong acceleration over the earlier part of the year.

Defying evidence of cooling activity in other indices, the BDO Employment Index, which predicts companies’ hiring intentions over a three month horizon, grew strongly from 109.6 to 111.2 in August.  This is the seventh month in a row that the Employment Index has risen, suggesting that the unemployment rate could soon return to pre-crisis levels.

Further encouraging news is provided by the BDO Inflation Index, which fell from 97.6 in July to 97.0 in August. This is only marginally above the 95.0 reading that indicates positive price growth. Low energy cost growth, a strong pound and weak wage growth are all contributing to low or negative price inflation for firms, easing pressure on companies’ margins.

Commenting on the findings, Malcolm Thixton, lead partner and head of BDO in Southampton, said: “After a strong start, the rest of 2014 is looking increasingly uncertain for businesses, with manufacturers being most affected. With anaemic growth enduring in our key trading partner – the Eurozone – and external shocks such as the crisis in Ukraine further dampening confidence, no one should be surprised to see growth impacted in H2 2014.

“An important knock-on effect in this regard relates to the Bank of England’s deliberations around interest rates. With weak demand in Europe keeping cost pressures on firms very low and domestic threats such as an overheating housing market seemingly largely under control, there seems to be very little in the short term that would necessitate an interest rate rise. The consensus is that rates will rise in Q1 2015. However, it would be no surprise if this moves back to later in 2015.”