Corporate Finance Partner, Peter Hemington, discusses the impact of Brexit and Trump on this month’s economic figures and finds business confidence on the up. Despite the good news, more action from the Government is needed to iron out any bumps ahead.
So far, despite the fears from economists and political pundits alike, the Brexit and Trump effect has not dented UK business optimism.
New figures published by BDO today shows that manufacturing confidence has reached a 20-month high. Confidence within the services sector has also increased to a 14-month high.
The figures come from our monthly Business Trends research – an analysis of over 4,000 different respondents from companies employing approximately five million employees. Together our data makes up the most representative measure of business trends available.
Increase in output
And it’s not just business confidence that is on the up. Our Output Index – which indicates how businesses expect their order books to develop in the next three months – has increased for the third consecutive month. This is another demonstration of the resilience of the UK economy since the EU referendum decision.
This positive performance of UK businesses is due three main reasons – an overall improvement in the global economy, the decrease in the value of sterling and better-performing key export markets.
However, despite the immediate benefit of sterling’s sharp fall in value and the optimistic mood of UK businesses, sterling’s devaluation represents a double-edged sword as it continues to contribute to rising inflation.
Rising inflation set to continue
BDO’s Inflation Index has increased to 104.5 from 103.8 and the upward trend is set to continue. While currency depreciation makes British exports more price competitive, firms’ input prices have risen sharply, squeezing margins. In January, Markit/CIPS PMI showed factory raw material costs rose at their fastest pace in over 25 years, a result of higher prices for oil, steel and other import costs.
For the manufacturing sector to continue to thrive following Brexit, UK manufacturers need to invest now to automate and digitise key business processes to remain competitive in a more dynamic and technologically advanced market. BDO’s New Economy report, which makes a number of policy recommendations for a thriving post-Brexit UK economy, calls on the Government to increase funding to support investment and help businesses modernise themselves for the challenges ahead.
So despite the positive indicators and an expected Q1 of solid growth, the government still has much to do in these uncertain times if the UK is going to stay on the right economic track.
Peter Hemington is Partner and Head of Corporate Finance at BDO