Posted on by John Sloman

Feeling low

Each month the accountancy firm BDO publishes its Business Trends Indices. These indices “are ‘polls of polls’ that pull together the results of all the main UK business surveys”. The latest report shows that the January 2013 Optimism Index was its lowest since the report began 21 years ago.

The Optimism Index predicts business performance two quarters ahead. In January 2013 it was 88.9. The way the index is constructed, a reading of 95 or more suggests that firms are optimistic about business performance. Clearly, they were pessimistic.

Although there was an increase in hiring intentions, firms were still predicting a fall in output. The indices for optimism, employment and output are shown in the chart. (Click here for a PowerPoint.)

As Peter Hemington, Partner, BDO LLP, commented:

In spite of a strengthening Labour Market, business confidence continues to weaken, and improved hiring intentions are not translating into growth plans. It seems the damaging effects on businesses of five years’ zigzagging economic growth, has left them wary of making concrete plans for expansion and resigned to the ‘new normal’ of economic stagnation.

To end this cycle, it is imperative that the Government implements plans to expedite growth. Without growth incentives, we will continue to see UK businesses reluctant to invest and expand, which poses a grave threat to the UK’s economic recovery.

The following articles comment on the gloomy mood of business and on its implications for output and investment. They also look at the implications for government policy.

Articles

Confidence slumps despite optimism from manufacturers Insider News (11/2/13)
Fears of a triple-dip recession return as survey puts business confidence at a 21-year low This is Money (11/2/13)
Pressure grows on ministers for growth strategy Yorkshire Post (11/2/13)
Triple-dip jitters as business confidence hits 21-yr low Management Today, Michael Northcott (11/2/13)

Report and data
Business Trends: Business confidence hits 21-year low signalling economic contraction BDO Press Release (11/2/13)
BDO Monthly Business Trends Indices, February 2013 – Full Report BDO (11/2/13)
Business and Consumer Surveys European Commission: Economic and Financial Affairs

Questions

  1. What reasons are given by the report for a decline in business optimism?
  2. Explain how an accelerator/multiplier interaction could compound the recession or help to cause a bounce back from recession.
  3. How does business sentiment in one country affect business sentiment in others?
  4. In the absence of a change in its fiscal stance, what policies could the government adopt to increase business confidence?
  5. Why might firms’ hiring intentions increase even though they are predicting a fall in output?