BDO's latest report indicates decline in business confidence

Optimism in the sector is said to have fallen by more than 26 points in four months to 90.1 in June, down from 116.4 in February.

According to BDO, the drop can be attributed to loosening demand domestically, as well as the global economic slowdown, with business sentiment in the Eurozone hit by the continuing sovereign debt crisis.

Peter Hemington, partner at BDO, said: ‘To reinvigorate the sector and the economy more widely, we need a three-pronged approach. First, we urge the government to implement supply-side reforms, particularly a reform of the tax system, measures to encourage private sector investment in infrastructure and introducing more flexible employment laws to facilitate businesses’ ability to react swiftly to volatile conditions.

‘Second, although inflation remains high, low interest rates are essential to maintain momentum for growth, by driving spending at a time when consumers are feeling the pinch.

‘Third, as recovery prospects over 2011 seem sluggish at best, the Bank of England should continue to consider a third round of quantitative easing to provide some much-needed impetus for growth.’

Manufacturing’s significance is indicated by data throughout the report; both the Output and Optimism indices have faltered as a result of its worsening economic performance.

June saw BDO’s Output Index fall to 96.3 from 98.2 in May, pointing to below-trend growth in the coming three months. Meanwhile, BDO’s Optimism Index, which shows how UK companies expect to trade in two quarters’ time, fell to 95.6 in June from a 12-month high of 99.1 in May. The index has now remained below the 100 mark — indicating trend growth — for 13 months. 

According to BDO, the poor forecast has been compounded by increasing inflationary expectations, with BDO’s Inflation Index reaching 112.9, which is the highest figure in 33 months. However, owing to the slowing pace of the recovery, a rise in interest rates could further derail growth prospects. 

‘The weakness of the pound, which should make manufacturing exports more competitive, has failed to generate the hoped-for returns,’ said Hemington. ‘Perhaps this is because, with today’s integrated global supply chains, the benefits of the low exchange rate have been offset by higher input prices.’

BDO’s Monthly Business Trends Indices are prepared by the Centre for Economics and Business Research. The indices are calculated by taking a weighted average of the results of the UK’s main business surveys.