Optimism in the economy across the services industry fell sharply in August to levels not seen since 2013, with further negativity reflected throughout BDO’s latest Business Trends report.
BDO’s Services Optimism Index collapsed 3.89 points in August to 95.49, only just above the 95 level that indicates that a recessionary mindset has taken hold. This drop in confidence has dragged the overall Optimism Index down by 3.21 points across the month.
The index provides information on future economic developments based on opinion surveys of over 4,000 respondents to constituent surveys and is a good indicator of economic growth in the sector six months ahead. History shows that when confidence falls, it can drive businesses to invest less and hire fewer people, in turn creating the conditions for a recession.
Employment Index fell by 0.26 points in August. Though this has been the most buoyant economic indicator in recent years, reflecting the UK’s extraordinary ability to create jobs through this economic cycle, the index has now been in decline for eight consecutive months. Elsewhere, BDO’s Output Index also fell by 0.37 points, marking the third month of decline for output.
This month’s dramatic fall in confidence is a very worrying event. Pessimistic companies don’t invest or hire, which is how recessions start. The reason for this has to be that UK businesses have suddenly woken up to the fact that a no deal Brexit is a real possibility.
This reminds me very much of the aftermath of the 2010 election, when there was a sudden realisation that austerity wasn’t going to be pretty. Sentiment collapsed as a result, and this was the precursor to a long period of very low growth that followed.
Let’s hope that we can avoid a no deal Brexit in the coming months, otherwise the next couple of years could be very uncomfortable.
Peter Hemington is a Corporate Finance Partner at BDO.