UK companies are relatively upbeat about economic conditions – even in the wake of the referendum vote to leave the EU, finds a study by BDO. Manufacturers, for instance, are currently enjoying single market access with a considerably lower sterling, services firms, however, remain concerned about the long-term prospects and a potential loss of market access. Companies expect inflation to increase on the back of higher import costs, while hiring trends remain relatively positive and stable after recent declines.
The referendum result in favour of leaving the EU resulted in an immediate depreciation of the sterling, while a downward trend has seen it fall to the lowest level in more than three decades. While political discussion surrounding the triggering of Article 50 gain steam, the latest BDO ‘polls of polls’ of four key business metrics sees the first upticks since what is likely to become one of Britain’s larger historical events.
The study by the accounting and consulting firm combines major business surveys* across the UK into a single index – providing an insight into how businesses across the UK currently feel about the economic climate. The index sets 100 as an average trend growth, while any score greater than 95 represents positive growth.
The index for business optimism increased slightly between July and September, to 99.5, after falling from its height in May of last year. Across industries however, there is a mixed bag of results. At services firms, confidence remains above that average confidence at 101.1, falling slightly from August’s 101.2. Optimism has been hampered slightly, according to the firm, as a result of continued post-Brexit uncertainty. Manufacturers remain relatively gloomy at 91.3, although light appears to be shining at the end of the tunnel, on the back of lower sterling, increasing the value of exports, with optimism up 5.5 points on the previous poll result.
The output index too has seen a considerable contraction as it plummeted from a level of almost 105 in September last year to 96.9 in the latest poll. The steep decline is partly due to concerns from the service sector, which is contending with uncertainty about the loss of single market access. Manufacturing has had a slightly positive boost to its index score, lifted by the lower sterling, which is increasing the net value of its exports via a vis international rivals, up from 93.9 in August to 95.1 in September.
The Inflation Index has increased slightly from a six year low seen last year, at below 95, to 102.4 today, as firms expect price increases to trend above the long-term average in the near future. The hike is the result of the slide in the sterling, which in September fell to $1.28 against the dollar, and, which has since depreciated further to just over $1.20. The lower sterling pushes up the price of imports, which is likely to affect the price of goods as producers and retailers pass on increased costs to consumers.
The employment index has seen a slight increase from 100.9 in August to 101.2 in September. The increase shows that firms are continuing to hire at rates above that of the long term trend. However, the index has seen a steady decline from peaks in 2015, largely, BDO’s analysts stipulate, the result of changes within the wider economy. The triggering of Article 50, and wider uncertainties in the near term, the firm notes, may result in additional uncertainties.
* CBI Industrial Trends Survey, CBI Monthly Trends Enquiry, Bank of England Agents' summary of business conditions, and Markit/CIPS Manufacturing and Services PMI data.