UK business outlook forecast to improve during current quarter

31 October 2017 5 min. read
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While the UK’s public finances face tough times, following the news that the IMF scaled back the nation’s growth predictions earlier this month, British business is forecasted to improve its performance according to a new study. Climbing employment and GDP, along with boosted business confidence, mean that the coming months could prove prosperous for enterprises in the country, in spite of continued anxiety relating to Brexit.

The UK economy has entered a period of uncertainty, with wider macroeconomic conditions bearing down on public and private finances. Consumers continue to face a range of challenges, as inflation ticks up on the back of the fall in pound, while real wages decline, which, coupled with increasing consumer debt, as well as pressure on Threadneedle street to act on interest rates, is likely to see consumer spending fall further. Many businesses, meanwhile, are in wait-and-see mode, as haphazard Brexit negotiations drag the UK and the EU business environments further into uncertainty.

As part of BDO’s research into the UK economy, it releases a quarterly ‘Industry Watch’ report, which covers the current business climate across key UK industries, as well as forecasts for their development. The report is developed by taking key economic indicators, compiling them, and assigning a value between -50 and +50, representing the UK economic environments’ current health, as well as forecasting its health for the coming two quarters. In addition, the report compiles industry specific outcomes, the Industry Watch, mapping them in a similar fashion, but based on that sector’s key economic indicators – from employment to order books.

Overall Industry Watch score

The report notes that in Q2, the reading stood at -4, up from -22 in Q1. The increase reflects improvement in the UK’s wider business environment. The private sector led the charge, with manufacturing seeing the needle move up again, largely on the back of increases in lending. Other factors that boosted Q2 included improvement in employment figures, which are now the lowest since 1975, as well as wider business confidence and GDP growth. The report also notes a relatively positive forecast for the rest of the year, at +5.

Despite record levels of investment in London seeing £5 billion in Chinese capital sunk into Britain’s capital city this year, the real estate and construction industry remains the poorest performing sector, up from -20 to -10. The industry continues to face employment issues as well as insolvencies. The effect of the EU referendum still being worked out in the industry, although it is slowly recovering from the -31 point it found itself at in Q3 2016, with political and economic uncertainties bearing on new project commissions, with forecast of slight improvement to -9 in the most recent quarter and -6 for the current quarter.

Real estate & construction and technology & communications

Technology & communications, meanwhile, scored -5, following its most recent low of -26. The sector is getting back on its feet, with a relatively positive +26 for the current half of the year. The increase is a reflection of improved employment figures.

Commenting on the sector’s result, Tony Spillett, Partner and Head of Technology & Media, said, “The UK’s creative hubs remain extremely innovative, internationally focused and successful. This vibrant technology and media sector is increasingly appealing to UK and overseas investors, both trade and private equity, as a great opportunity to back high growth businesses - this is reflected in the forecast for the second half of the year. Whilst the sector also has its challenges, such as the availability of relevant skills and access to competitive funding at early stages, it remains in great shape for future growth.”

Financial services and business services

The financial services sector, meanwhile, is set to increase its score from -9 in Q2 2017 to -7 for the rest of the year. Financial services continue to face considerable challenges from a potentially difficult post-Brexit environment, although, as Neil Fung-On, Partner and Head of Financial Services explains in the report, “It is pleasing to see confidence in the Financial Services Sector improve in the quarter regardless of the current political and economic uncertainty driven by Brexit. Whilst firms have been coming to terms with potential outcomes of Brexit and have started to put contingencies in place, the UK is still the financial services centre of the world and this is unlikely to change in the medium term.”

Business services, among which the professional and consultancy services, has seen its fortunes rise to +7, largely as a result of a surge in confidence, as well as smaller increases in employment and lending. The sector, while increasing to +19 on the back of its wider flexibility, will, according to study, need to plan for uncertainties such as access to talent that may arise from Brexit.

Public sector and manufacturingThe public sector remains in the doldrums, and will continue to see its position in the negative for the current half of the year. Austerity has hit the segment hard, although changes to pay-caps are likely to improve the longer-term outlook somewhat.

Manufacturing remains one of the most well positioned sectors, with export boosted by a lower pound, higher than expected employment figures and strong performances in key trading partners’ economies, the sector hit a +10 score for Q2 2017. The good run is expected to continue, at least into this half of the year, with a forecast +27 on the needle. This is liable to change, however, as businesses weigh up relocation in the coming months, with a No Deal Brexit and the punitive tariffs resulting from it meaning migrating to the mainland may prove essential to many companies’ profitability.