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Economic prospects zigzag as UK business confidence falls

UK business confidence across all industries has fallen to its lowest point this year, with economic prospects following a zigzag path, according to the latest Business Trends report by accountants and business advisers BDO.

BDO’s Optimism Index - which predicts business performance two quarters ahead - has hit a seven-month low, falling for the fifth consecutive month from 93.5 in June to 93.1 in July.

This follows a brief resurgence in business confidence seen in Q1 2012, where confidence reached as high as 98.0, but now reads at the lowest level since December 2011.

The index has also moved further away from the crucial 95.0 mark that indicates in BDO's estimates if the economy will return to growth, pointing to contraction for the remainder of 2012.

Fluctuating confidence levels in the manufacturing and services sectors also serve to highlight the zigzag path of UK economic prospects.

Belying the decrease in confidence in the overall Optimism Index, confidence in the manufacturing sector improved substantially in July, moving up from 83.8 in June to 90.5 this month, following a decline of 8.4 points from May to June.

The increase of 6.7 between June and July is the highest monthly rise since February 2011 and is likely to be on account of the UK manufacturing sector diversifying its exports, with more than 50% of its trade now being exported to outside the erratic Eurozone.

Yet in another divergent move, service sector confidence declined in July, falling by 2.1 points to 93.8.

This dip in confidence follows consistent increases between February and May, demonstrating how unsettled optimism levels in key UK sectors are generating the zigzag pattern of business confidence in the overall UK economy. Crucially, this means that both indices remain under the 95.0 mark that indicates growth.

Peter Hemington, BDO, said: “This month’s figures serve as a stark reminder of the continuing difficulties the UK economy faces, with zigzagging business confidence undermining the improvement in confidence that we saw at the start of 2012.
“Where there is cause for cautious optimism is in the revived confidence in the manufacturing sector. The sector should be applauded for taking a pragmatic and adaptable approach to diversify exports away from the volatile Eurozone. ONS figures in July showed that for the first time more than 50% of the UK’s goods went to countries outside the Eurozone.”

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