Economy set for robust growth in first half of 2014, says BDO report

Business confidence has increased for the tenth consecutive month, and suggests the economic recovery will gather pace in the first half of 2014, according to the latest Business Trends report by accountants and business advisers BDO LLP in Southampton.

BDO’s Optimism Index, which predicts business performance two quarters ahead, increased from 101.7 in October to a 43-month high of 103.1 in November, taking it comfortably above the 100.0 mark that indicates the economy’s long-run average growth rate.

Increased business confidence is taking hold across the economy, with optimism in the services and manufacturing sectors both above the crucial 100.0 mark for the first time since April 2010.

Optimism in the services sector, which accounts for just over three-quarters of the economy, rose to 100.4 in November, up from 99.9 the previous month.

Optimism among manufacturers, driven by rapid growth in new business orders, rose from 109.6 in October to 115.3 this month – the sub-index’s second highest reading in Business Trends’ 21-year history.

Business conditions also continued to improve in November, and provide further evidence that the economy’s recovery is broad-based. BDO’s Output Index, which predicts short-run turnover expectations, went up from 100.7 to 101.8 in November, with both the manufacturing and services sub-indices increasing strongly this month. The strengthening Output Index points to a strong end to 2013 for the economy.

In further welcome news, inflationary pressures look to be receding. The BDO Inflation Index was down from 100.5 in October to 99.7 this month – below the all-important 100.0 mark that indicates inflation’s long-term trend. Holding down cost inflation for labour-intensive services firms, total wages were only 0.7% higher during July-September 2013 than one year before. Helping manufacturers control costs, the oil price fell by 2.3% over the year to November 2013 in sterling terms. Similarly, total manufacturing input prices decreased by 0.3%, easing manufacturing cost pressures.

Malcolm Thixton, lead partner and head of BDO LLP in Southampton, commented: “This is a strong and broad-based recovery. I think we can finally say that the key economic battleground has shifted from austerity to the new debate about how the government can help businesses achieve sustained growth in the context of a dynamic, internationally competitive economy.

“We clearly have some substantial long-term problems in terms of an underperforming education system and a dysfunctional planning regime. Only time will tell whether the Coalition Government’s radical plans for educational reform will work, but at least there is plenty of energy behind implementing these. Planning seems to have been filed in the “too difficult” box by successive governments, so real change is unlikely anytime soon.

“Just as importantly, there still remains a very strong case that we need to spend more on infrastructure, particularly on updating our tired, expensive and increasingly life expired energy industry. If the government can at least partly crack these issues, the economy has a chance of getting back to good levels of sustained long-term growth.”

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.