UK business optimism remains, despite output dropping to four-year-low

Georgina Varley
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BDO's Business Trends report for May reveals UK business optimism despite drop in production levels (Source: Getty)

UK firms remain optimistic about the future, despite business output dropping to a four-year low.

The figure for BDO’s Output Index, which indicates how businesses expect their order books to develop and is published today, fell from 95.9 in March to 95.6 in April.

This is significantly below the long-term growth trend of 100 and only just above 95.0, the point of contraction.

Read more: Trumping Brexit: UK manufacturing confidence hits 20-month high

A dip in the services sector is primarily to blame for the poor output figures revealed in BDO's latest Business Trends report.

The services sector makes up the majority of the UK economy. In April last year, BDO’s Output Index for the services sector sat above the long-term growth trend at 100.4. However, it has since fallen to 95.3, its lowest level since June 2013.

Although production levels are poor, optimism for the future remains as BDO’s Optimism Index rose from 102.2 in March to 102.5 in April.

Peter Hemington, partner at BDO, said: "There appears to be growing disconnect between what businesses are experiencing now and how they expect their order books to develop in the coming six months. Current output levels are very close to a zero-growth level, yet UK business people are strongly optimistic."

Confidence is particularly strong in the manufacturing sector. BDO’s Manufacturing Optimism Index has risen from 110.6 in March to 112.2 in April, and is now at its highest since January 2015.

This reflects BDO's Manufacturing Output Index which is currently at 97.1, well above the 2016 average of 95.2. The sector has been bolstered by the post-EU referendum fall in the value of sterling, which has made products more price-competitive.

The optimism of UK manufacturers is especially high following the growth of the sector in the first quarter of 2017. This is likely due to the slight strengthening of the pound following the announcement of the general election in April and inflation growth beginning to stabilise. BDO’s Inflation Index fell from 105.2 in March to 104.7 in April.

Read more: Businesses growing strong in first quarter of 2017

Commenting on the gap that has emerged between UK business optimism and existing order books, Hemington added, "We haven’t seen anything quite like this since 2009. Then, UK businesses were so used to continuous economic growth that they couldn’t quite believe it when the good times didn’t immediately return. Something similar seems to be happening at the moment. UK businesses seem to be excited and upbeat about a post Brexit ‘global Britain’. This is despite their current experience of very subdued economic conditions."

BDO's Business Trends report for May was released on Monday.

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