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UK business confidence continues to increase

UK business confidence continued its upward trend this month, and reached its highest point since May 2012.

According to the latest figures from BDO's Optimism Index, which predicts business performance two quarters ahead, the figures moved up for the fifth consecutive month from 93.6 to 94.3, a 13-month high.

Optimism in the services sector, which makes up roughly three quarters of the UK economy, is particularly strong, and moved up to 95.5 this month - above the crucial 95.0 mark that indicates growth.

BDO’s Output Index, which predicts short-run turnover expectations, increased for the fourth consecutive month to 94.9 in June from 94.4 in May.

The index now also stands at a 13-month high and is just 0.1 away from the critical 95.0 level. The Output Index for manufacturers moved up significantly by 2.0 points to 95.7 this month - above the 95.0 level.

Additionally, inflationary pressures look to be receding as BDO’s Inflation Index decreased from 104.2 to 103.4, thus easing financial pressures on UK businesses.

However, despite this welcome news, and despite two quarters of improving business confidence, both the Optimism and Output indices remain muted, below the crucial growth level of 95.0.

External pressures such as Eurozone volatility, belt tightening by UK consumers and the US Federal Reserve signalling that quantitative easing (QE)  tapering is on the horizon, are likely to be weighing on UK businesses’ minds.

Peter Hemington, partner, BDO LLP, said: “While it’s encouraging to see confidence continuing to improve, we should be mindful of the zig-zag trend that has characterised UK business confidence since 2008.

"Periods of improved confidence have ended before growth has really begun to get going.

"On the last couple of occasions, this has been because of crises in the Eurozone.  This time, the worry is that financial market turmoil arising from the actions of the Federal Reserve will choke off yet another nascent UK recovery.  As a result, the new Governor of the Bank of England perhaps has an even more interesting set of challenges to face than he might have expected when he accepted the job.”

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