Private sector hiring intentions reach 30-month peak as business confidence approaches record high

BDO’s Employment Index has reached a 30-month peak, as hiring expectations catch up with improving UK business confidence, according to the latest Business Trends report by accountants and business advisers BDO LLP in Southampton.

The BDO Employment Index, which measures businesses’ hiring intentions over the next two quarters, reached 99.4 in December, up from 98.3 in November. The index has now been at or above the crucial 95.0 level that indicates employment growth for 12 months and is now almost at the 100.0 mark which points to employment increasing at its long-term rate. This indicates that employment is gaining pace with the wider economic recovery.

In line with this, business confidence showed similar improvement. BDO’s Optimism Index, which predicts business performance two quarters ahead, reached 103.4 in December, up from 103.1 in November. This is the index’s highest reading in seven and a half years, marginally below its highest score in Business Trends’ 22-year history, and comfortably above the 100.0 mark that indicates trend growth (approximately 2.4 per cent) of the economy.

Buoyant readings for both the services and manufacturing sectors indicate that sustained economic growth is likely during the first half of 2014. In the services sector, which accounts for roughly three quarters of the UK economy, new orders and clients’ willingness to commit to contracts lifted optimism to 100.7 in December, up from 100.4 in November. The manufacturing confidence sub-index reached 115.5, up from 115.3, close to its all-time high, suggesting that manufacturing will see robust growth through the second quarter of 2014.

This positive outlook is underpinned by continuing improvement in business conditions as the Output Index, which reflects current order books and therefore predicts short-run growth expectations, increased to 102.5 in December, up from 101.8 in the previous month. The manufacturing sub-index rose from 108.1 in November to 109.8 this month, its peak since April 2011, while the sub-index for the services sector rose for the seventh consecutive month to reach 100.8, up from 100.4.

Inflationary pressures on businesses continued to ease in December, creating a more benign operating environment, as the BDO Inflation Index declined for the seventh consecutive month to 98.7 from 99.7 in November. Total wages continued to grow by less than the annual rate of consumer price inflation, meaning real wages are falling, while the cost of Brent Crude oil fell 0.1% in sterling terms over the year to December, helping manufacturers control costs.

Malcolm Thixton, partner and head of BDO LLP in Southampton, commented: “We’re encouraged to see that businesses are growing in confidence and have sharply increased their hiring intentions over the past month, which should help to keep the unemployment rate on a downward trajectory.

“The issue of unemployment is particularly important given the Bank of England Governor Mark Carney’s decision not to allow an interest rate rise until the unemployment rate is at or below 7%.

“The flip side of all this is that labour productivity is still far below its pre-crisis peak. As a result, the issue of underemployment remains, with some 1.5 million workers seeking full-time jobs being forced to work part-time over August-October 2013.

“Linked to the debate around employment is the politically sensitive issue of immigration. The Government will undoubtedly be waiting with baited breath to see the effect of the relaxation of border controls that came into force on January 1st 2014. However, our data suggests that the UK has the capability to create more jobs both for UK citizens and for others than some might expect.”

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.