Optimism across businesses in the UK jumped by the largest margin in a decade in February, according to figures from the latest BDO Business Trends report, but the prospect of the continued spread of COVID-19 (coronavirus) could threaten to reverse much of the gains.
BDO’s Optimism Index, which provides the most comprehensive snapshot of business sentiment by weighting macroeconomic data from the UK’s main business surveys, rose by 5.80 points in February and now stands at 101.64 – above the 100 level which represents the historical average.
The services industry experienced the sharpest rise as businesses welcomed the ending of the Brexit stalemate following the UK’s departure from European Union.
The surge in confidence reflects the underlying improvement in business conditions as a result of a more certain political and economic outlook, particularly around Brexit, after a long period of instability. It follows three months of marginal increases in optimism as businesses appeared to be in ‘wait and see’ mode in the immediate aftermath of the General Election.
Historically, however, major macroeconomic shocks can knock several points off BDO’s Optimism Index, which means coronavirus could wipe out the gains made in February.
Commenting on the results, Malcolm Thixton, Lead Partner at BDO in Southampton, said: “We have just witnessed the most significant uplift in business optimism in 10 years, and the impact of greater political and economic certainty brought by a new majority Government should not be underestimated. However, businesses will now be spending the coming weeks focussed on mitigating the uncertainty caused by coronavirus.”
The overall jump in business confidence in the UK was driven by BDO’s Services Optimism Index, which increased by 6.52 points to 102.38, while the Manufacturing Optimism Index rose marginally in February by 0.13 points to 95.82. The comparatively smaller rise in manufacturing optimism reflects the fundamental problems facing the sector, including the higher cost of trade that will be imposed by leaving the EU.
Elsewhere in BDO’s Business Trends report there were clear signs of the impact of coronavirus. BDO’s Inflation Index fell by 0.48 points to 95.59, largely driven by dwindling commodity prices caused by factories in China temporarily shutting. Input Inflation fell by 2.01 points to 92.33 as a result of fluctuations in global commodity markets.
Malcolm Thixton added: “The next month will be crucial in determining whether this optimism can remain, or if the ‘Boris Bounce’ will be brought back down to earth by the impact of the coronavirus outbreak. For once in recent times, it may be something other than the political landscape holding the UK economy back.”