UK business output is now at the point of contraction, according to the latest Business Trends Report by accountants and business advisers BDO (
www.bdo.co.uk).
This says that BDO’s Output Index, which indicates how businesses expect their order books to develop over the next three months, fell from 95.4 in May to 94.9 in June (dropping below 95.0 indicates contraction), leaving UK business output at a four-year low.
BDO says that the growth in order books of UK businesses has been slowing since the end of summer 2015 and underlines the possibility of further weakening in Q2, following subdued growth at the start of 2017.
The poor performance of the UK services sector, which makes up the majority of the UK economy, continues to stunt economic growth; and while the manufacturing sector has shown encouraging signs of growth for the last six months, the Manufacturing Output Index dropped 0.1 points in June to 97.6, indicating that the manufacturing sector is growing, albeit at a rate below the long-term norm.
Despite the Output Index suggesting limited current growth, BDO says its Optimism Index (this indicates how firms expect their order books to develop in the coming six months) suggests a brighter future — increasing from 102.8 in May to 102.9 in June.
The eight-point difference between the optimism and output indices is the largest ever on record, and BDO suggests this implies that UK businesses are expecting a flurry of business activity following the political uncertainty in June, which led many businesses to delay their investment plans.
BDO partner Peter Hemington said: “Since the financial crisis, the UK’s economic recovery has been reliant on consumer spending and a growing services sector.
“For the past two years now, we have witnessed both a decrease in the performance of the services sector and a reduction in consumer spending, which has become more pronounced after the devaluation of sterling.
"To deal with the pressures of rising inflation and to accelerate economic growth, the UK’s monetary policy makers are seriously considering raising interest rates.
"However, given the economy’s clear weakness and the continuing uncertainty we are going to see from Brexit, to raise interest rates at the moment would be a major mistake.”