Business confidence at record high


While large swathes of the country were under water a couple of weeks ago, it’s not dampening business confidence according to the accountancy industry body the ICAEW. A survey for the association, produced by accounting giant Grant Thornton, found that business confidence has now increased for six quarters in a row.

This is echoed by reports from fellow accountants BDO. It’s Business Optimism index, which predicts business performance two quarters ahead, reached its highest level for the 22 years of its existence in January, indicating that the economy will continue to grow rapidly over the coming six months.

The Index registered 103.8 in January, up from 103.4 in December, and sits well above the 100.0 mark, meaning the UK is expected to outperform its long-term historical growth trend.

Meanwhile, in the manufacturing sector, BDO’s Optimism sub-index rose to a new all-time high of 117.1 in January, up from 115.5 in December. And for services, which accounts for roughly three quarters of the economy, confidence rose to 101.2 in January, up from 100.7 in December.

New confidence levels mean more jobs

And this is great news for jobs. Falling input prices have helped manufacturers control costs over the past year and in the all-important services sector, annual wage growth of only 0.9% held down the cost of inflation for labour-intensive services firms. As a result recruitment expectations also increased during January, with BDO’s Employment Index rising to 101.3, up from 99.4 the previous month.

Speaking to Financial Director magazine, Peter Hemington, partner at BDO, said: “Companies are raising headcounts in response to rising client demand and the data suggests that the unemployment rate is likely to fall below the Bank of England’s 7% threshold for considering raising interest rates in the very near future.”


Spare capacity to keep inflation low

But despite the above-trend growth forecast by the study, BDO believes there is enough spare capacity in the economy to ease any concerns over inflation.
Hemington continued: “An interesting feature of the recovery so far has been the way in which UK productivity remains at levels last seen in late 2005. Looking at this optimistically, this means that the UK can continue to grow for some time by increasing productivity before wage-related inflationary pressures begin to kick in.”

Interestingly, the Lloyds Bank commercial banking regional Purchasing Managers’ Index found business activity across the English regions at a seven-month low, though still indicating strong growth.

The reading of 59.1 was down from 60 in December, but it remained above the 50 mark signalling growth for the 15th consecutive month.

The South West was the best performing English region for growth in January, followed by the South East and West Midlands. All regions made a positive start to the year but the slowest growth level was among firms in the East Midlands.


Challenges still lie ahead

However, it’s not all good news with a lack of export growth giving cause for concern as well as a potential skills shortage on the horizon, particularly within the services sector, which could lead to an escalation in wages.

Ultimately growth forecasts are now showing Britain to be on a “firmer footing”, with this new level of business confidence expected to translate into higher capital spending this year and more balanced growth. Indeed, fears about export growth could be unfounded with forecasts predicting an increase in activity amid the “well entrenched” recovery in America and stronger growth in the eurozone, particularly in Germany and the periphery.

The Telegraph seems to think that the strength of performance in the economy could result in George Osbourne scrapping his austerity drive after the next election. Fingers crossed.

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