BDO partner Peter Hemington looks at the latest data on UK output and business confidence and sees some positive signs.
As the cliché says, businesses hate uncertainty. With that in mind, 2017 ended with some positive news for the economy as both sides in the Brexit negotiations signalled that enough progress had been made on phase one of the talks to progress on to phase two – discussions around a possible future trade deal.
According to our latest business trends report – a survey which covers over 4,000 different respondents from companies employing approximately five million employees – businesses are more optimistic about 2018 following the progress made towards Brexit at the end of last year.
Our Optimism Index, which indicates how firms expect their order books to develop over the coming six months, increased to 102.15 in December from 102.05 in November, above its long-term average.
However, despite the positive outlook for 2018, business output growth has fallen to a 23-month low. BDO’s Output Index, which indicates UK business output for December, fell to 98.45, from 98.99 the previous month. Business output growth has now fallen for the past five consecutive months.
The UK’s falling output growth is being driven by the slowdown of the services sector, which accounts for almost 80% of all UK GDP. BDO’s Services Output Index also sits at a 23-month low, falling from 98.95 to 98.21 in December. The sector has been weighed down by Brexit uncertainty which has since been reduced following the progress made in December which has led to the rise in optimism.
It’s not all doom and gloom. UK Manufacturing output continues to strengthen. In December, BDO’s Manufacturing Output Index climbed above the long-term trend of 100 for the first time in four months, rising to 100.33 from 99.33 in November.
The rise in business optimism is also being reflected in the jobs market. BDO’s Employment Index, which indicates firms’ employment intentions, has increased 0.2 to 111.26 in December, which is well above the long-term trend and only just below its record high of 111.72. The findings suggest that employment levels could surpass the records set in September last year.
So what should be done to capitalise on this optimism? While the government prioritises securing our future outside of the EU, it must not overlook the immediate challenges stifling the growth of our economy. The perennial productivity problem must be addressed by accelerating investment in infrastructure and training before we fall further behind our G7 counterparts.